redacted 091119a motion to dism · maquet cv us sales, who then sells it to customers and then the...
TRANSCRIPT
*NO COPY OF THIS TRANSCRIPT MAY BE MADE PRIOR TO DECEMBER 23, 2019
UNITED STATES DISTRICT COURTFOR THE DISTRICT OF NEW HAMPSHIRE
* * * * * * * * * * * * * * * * * * * IN RE: ATRIUM MEDICAL CORP. C-QUR MESH PRODUCTS LIABILITY LITIGATION
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1:16-md-02753-LMSeptember 11, 2019 9:03 a.m.
* * * * * * * * * * * * * * * * * *
REDACTED TRANSCRIPT OF MOTION TO DISMISSDAY THREE - MORNING SESSION
BEFORE THE HONORABLE LANDYA B. McCAFFERTY
Appearances:
For the Plaintiffs: Jonathan D. Orent, Esq.Motley Rice, LLC
Brian A. Glasser, Esq.Katherine E. Charonko, Esq. Bailey & Glasser LLP
Susan Aileen Lowry, Esq.Upton & Hatfield, LLP
D. Todd Mathews, Esq.Gori, Julian & Associates, PC
For the Defendants: Mark S. Cheffo, Esq.Katherine Armstrong, Esq.Katherine E. Unger Davis, Esq.Dechert, LLP
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APPEARANCES CONTINUED:
For the Defendants: Pierre A. Chabot, Esq.Wadleigh, Starr & Peters PLLC
Court Reporter: Liza W. Dubois, RMR, CRROfficial Court ReporterU.S. District Court55 Pleasant StreetConcord, New Hampshire 03301 (603) 225-1442
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I N D E X
WITNESS: Direct Cross Redirect Recross
CHAD CARLTON 4 76 97
ALEX FERNANDEZ 102
EXHIBITS: FOR ID IN EVD
Plaintiffs' 237-243 75
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P R O C E E D I N G S
THE CLERK: The Court has before it for
consideration today day three in the motion to dismiss
hearing in In Re: Atrium Medical Corporation C-Qur Mesh
Products Liability Litigation, MDL docket number
16-md-2753-LM.
THE COURT: Okay. I think it's time for the
cross of Mr. Carlton.
And you were under oath, placed under oath
yesterday. We don't need to do that, place you -- re --
reoath you, do we?
THE WITNESS: No, we do not.
THE COURT: All right. So I'll just remind
you you're under oath.
Attorney Orent.
MR. ORENT: Thank you, your Honor.
CROSS-EXAMINATION
BY MR. ORENT:
Q. Good morning, Mr. Carlton. How are you?
A. Good morning, Mr. Orent. Doing well.
Q. You clearly remember my name, so I don't need
to reintroduce myself, but I'm glad to talk to you
again.
You've been here for the last three days,
correct?
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A. Yes, I have.
Q. Okay. And you've seen all of the witnesses
and heard all of the testimony so far; is that right?
A. Yes, I have.
Q. Okay. Today, one of your job titles is
president of Atrium Medical?
A. Yes, it is.
Q. Okay. You would agree with me that some of
the transactions that are involved in the sale of
medical devices that Atrium manufactures are complex
transactions, right?
A. I would agree they're complex transactions,
yes.
Q. Okay. In fact, all of the sales, as you
described yesterday and under the new contract that
began in 2017, all of the sales are fairly sophisticated
types of transactions, correct?
A. Can -- you said a specific date there?
Q. Right.
A. I'm sorry.
Q. I was referring to the October 21st, 2017,
contract --
A. Okay.
Q. -- where Getinge USA replaced Maquet US Sales?
A. Yes.
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Q. Okay. So let me ask this in two separate
questions.
The transaction that you discussed yesterday
where Atrium produces and sterilizes its medical
devices, sells it to Maquet CV LLC, who then sells it to
Maquet CV US Sales, who then sells it to customers and
then the profit gets returned in the way you described
yesterday, that is a fairly sophisticated and complex
transaction, correct?
A. It's the transfer of funds. I think each
individual transaction may not be complex. I think when
you're dealing with multiple transactions, you could
call that complexity.
Q. Okay. Would you agree with me that contracts
and documentation for things like that are very
important?
A. Yeah. As you -- having transactions are
important, yeah. I mean, having documentation for
transactions is important.
Q. Okay. And it wouldn't be a good thing for a
medical company to sell its medical devices without a
contract, correct? Through a transaction like this.
A. You would want a -- I mean, we created
contracts for that.
Q. Okay. And there were two of them and we'll go
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through that in a little bit, right? There's the one
with Maquet Entities and then there's the one with
Getinge US Sales, right?
A. I think there's more than just one contract.
I think there's multiple contracts with different
entities globally.
Q. Right. We'll get through that in a minute.
A. All right.
Q. I also want to just, as a preliminary matter,
go through -- we heard a lot of names yesterday and I
just want to make sure that I got it straight.
So Maquet, which was -- or Maquet Medical
Systems, that's not a -- that's not an incorporated
entity, correct?
A. So Maquet Medical Systems, to my knowledge, is
not. It's Maquet Holding would be what some people
refer that to. But there's a lot of Maquet -- there's a
lot of entities with the name Maquet in them.
Q. Okay. When referring to the medical systems
unit as Maquet, that's not incorporated, right?
A. Not to my knowledge, no.
Q. Okay. And that became Acute Care Therapies, I
think you testified to yesterday?
A. Yeah. And for some clarity, it wasn't the
exact structure that became Acute Care Therapies. Some
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of the businesses that were part of Maquet Medical
Systems were no longer grouped in that grouping. So
some of them went over to a different division within
Getinge Group.
Q. Okay. But for simplicity's sake, ACT is the
essential replacement of the Maquet Medical Systems
group, is this unit?
A. Yes. 75 percent, 80 percent of it, yes.
Q. Okay. And the Getinge Group, I think you
testified also, is not an incorporated entity, right?
A. Getinge Group, as I stated, was a -- I
consider it a brand name or a -- you know, for
encompassing all subsidiaries, indirect and direct, of
Getinge AB.
Q. Okay. Now, yesterday you were here when
Mr. Messina was questioned about his belief and his
opinion that mesh liability was known or knowable by
Atrium as of sometime in 2014. Do you recall hearing
that testimony?
A. I do recall hearing that testimony.
Q. Okay. Did you disagree with him?
A. What, that there was lawsuits on mesh? I
would agree that there were lawsuits in mesh in 2014.
Q. Okay. In fact, you were aware of substantial
litigation around polypropylene mesh in 2014; isn't that
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right?
A. Can you clarify your definition of
substantial?
Q. Sure. You were aware that there had been some
major hernia mesh litigation around Composix Kugel mesh,
right?
A. Yes.
Q. All right. And you were aware that that
settled in around I think 2011 or '12 for about
$200 million, right?
A. I don't recall exactly the figure, but I'll go
with you on that.
Q. Okay. And you were also aware that there were
tens of thousands of polypropylene mesh cases used for
other indications in West Virginia courts against about
33 medical mesh manufacturers, right?
A. Are you referring to the pelvic mesh?
Q. Yes.
A. I was aware of the -- the pelvic mesh
litigation, yes.
Q. Okay. And Atrium had an ongoing concern
through 2013 and '14 and even later about the uses of
its products because of potential litigation and
liability relating to certain uses of its devices,
right?
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A. You mean off-label uses of the device?
Q. Potentially, yeah.
A. Yeah, there were concerns about off-label
usage, yes.
Q. Okay. And you were aware that in 2013 --
2014, the first of the vaginal mesh manufacturers,
polypropylene mesh manufacturers, settled for almost
$830 million, right?
A. I'm not sure that I was aware of that. It
doesn't recall, but I may have been informed if it did
occur.
Q. Would you disagree?
A. You know, in -- I wouldn't disagree that that
happened.
Q. Okay. In 2012, you were with Atrium, correct?
A. Yes.
Q. And you were aware -- John, if I could have
exhibit -- Plaintiff's 3, if we could go to the second
page, and if you could zoom in on that second paragraph.
Sorry. I just called you John. I thought
John was there. Hi, Gina.
And could we just back up and I want to get a
little bit more of the whole paragraph.
Thank you.
You see here that on this date in December
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2012, Atrium identified 629 complaint files containing
630 complaints. One was filed with two complaints by
accident.
Do you see that, in the first sentence?
A. So Atrium identified a total of 629 files
containing 630 complaints. Is that what you --
Q. Right. Do you see that?
A. Yes.
Q. Okay. And if you look at the next sentence,
14 of those were specific to one type of complication,
that is C-Qur infections, referenced in the FDA warning
letter.
A. Uh-huh.
Q. Right?
A. Yes.
Q. Okay. And these complaints, these 630
complaints, had not been reported to the FDA and Atrium
had to go through them to determine how many of those
complaints needed to be reported to FDA through the MDR
process, right?
A. Yeah, they were complaints that were already
reported to Atrium. It was just whether they were filed
to the FDA.
Q. Okay. And it turned out that 231 of those
complaints had been determined to require reporting to
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the FDA, right?
A. That is because we managed to become more
conservative in our approach to reporting.
Q. You would agree with me that based on this
letter, 231 complaints were determined to require MDR
reporting?
A. Based on the method that we used to report,
yes.
Q. Okay. And MDR reporting is a requirement of
FDA, right?
A. The -- yes, you are required by the FDA to
report MDRs, yes.
Q. And just for the record, can you tell us what
MDR is?
A. Medical device reporting.
Q. Thank you.
And if we could turn to Exhibit 183 and if we
could go to the bottom of page 1, paragraph A.
Do you see there in paragraph a: The C-Qur
family of surgical mesh devices commercially released
and continued to be distributed without adequate
verification of sterile package integrity or performance
over the labeled shelf life.
Do you see that?
A. I'm aware of that, yes.
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Q. Okay. And if we turn the page to observation
number 3 on page 4. Excuse me.
And here, Atrium -- FDA finds that the
procedure for corrective and preventative actions has
not been adequately established. And, again, this is
with specific regard to C-Qur, correct?
If you look at paragraph --
A. Yeah, I'm -- I'm trying to read the whole
thing.
Can you -- can I see the next page, just to
read --
Q. Absolutely.
A. -- what it's all related to?
Q. Would you like a paper copy?
A. That would -- actually, if you just zoom in on
that top part, I think it'll be all right.
Okay. Yeah, I -- I'm aware of what that
finding is related to.
Q. Okay. And corrective and preventative actions
are where nonconforming products or nonconformities in
process have been identified and they need to be fixed,
essentially; is that right?
A. The -- you have identified something within
your quality system. So we identified a CAPA. We
identified that and, yes, the goal was to fix something.
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Q. Yup. Okay. So I'm going to show you what
I've marked as Exhibit 241. And this is a proactive
customer letter released on August -- April 29th, 2014,
and says: Proactive customer letter. There have been
inquiries in regards to Atrium's polypropylene mesh and
the release following announcement on FDA's website.
Do you see that?
A. Yes, I do.
Q. And essentially what Atrium is trying to do
here in April of 2014 is tell the world that our meshes
aren't subject to this and you shouldn't be using it
off-label, but for proper use, our mesh is okay. Is
that roughly what you're trying to say?
A. So can I see -- where does this letter come
from --
Q. This came --
A. -- and when was this sent?
Q. This was a draft email, excuse me, a draft
letter that was in -- do we have the custodial
information?
Have you seen this document before?
A. I -- I don't know the context with it and the
format of it, I'm not familiar with it. So it may have
come to me, but I'm just -- I'm only seeing a certain
portion of this.
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Q. Okay. Let's look at Exhibit 242. This is a
newspaper article from April 30, 2014, the following
day, noting that Endo agrees to a $830 million
settlement of vaginal mesh cases.
As president of a medical device company, you
would want to be up to date on competitive information,
correct?
A. I wasn't president at this time, but yes, I
would, as president, like to be up to date on
significant events in various industries, yes.
Q. Okay. But even in your head, in your role in
marketing, you would want to be aware of things like
this, right?
A. Yes, very much so. Yes.
Q. Okay. So do you agree with me that mesh and
mesh litigation was something that -- that Atrium was
aware of and would be concerned about monitoring?
A. The -- we were aware of the various items that
you have identified. So, yes, we were aware of Kugel
and also of vaginal mesh or pelvic mesh, as it's more
known.
Q. I'd like to turn to Exhibit 192.
And before we do that, actually, let me ask
you, do you know who Scott Waxler is?
A. Scott Waxler, I believe -- yes, I do. He was
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the -- he's an invest -- I want to call him an
investment banker, but he's a banker of some sort to
deal with the transactional merger. I can't remember
his exact title.
Q. And who is Eric Bielen?
A. Eric Bielen is our -- he's had a couple of
titles recently, so I'm just trying to -- but he's in
charge of our mergers and acquisitions and divestitures.
Q. And he's an employee of Getinge AB?
A. Currently, I think -- I don't -- I can't say
that for sure. I think because he's based out of
Belgium, he may not be an employee of Getinge AB.
Q. Would you agree that at one point he was?
A. I know -- I would agree that he's been part of
a subsidiary or an indirect subsidiary. I don't know
for sure that he was an employee of Getinge AB.
Q. All right. Would you agree that -- well,
let's look at Exhibit 192.
And Scott Walker -- excuse me --
A. Waxler.
Q. -- Waxler was involved in the project star
attempt to sell the mesh unit from -- to outside
individuals, correct?
A. Can you rephrase that, repeat that?
Q. Sure. Scott Waxler was hired as an investment
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banker to divest the hernia mesh business, correct?
A. And, again, the investment banker -- I'm not
sure on the exact title, but, yes, I would agree with
you on that.
Yes, there you are. He's an investment
banker.
Q. All right. So I want to show you an email
from Kai Trompeter to Scott Waxler dated 3/20/17.
A. Kai is how you produce his name.
Q. Okay. And Kai was one of the interested
bidders in the mesh line, correct?
A. He has been interested on and off over a
number of years, yes.
Q. Okay. And he says: Can you give me a brief
update on the below? And the title of the article is
Ohio Woman Sues Atrium Over C-Qur Hernia Injuries.
Do you see that?
A. I see that, yes.
Q. Okay. And if we could look at the next email
in the sequence, it says -- Scott forwards this to
Michael Dupont.
It says: Michael, can you please provide
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answer to me on Kai's question below. Have a great
weekend. PS, the issue that this question represents
seems to be representative of forward deal momentum.
Do you see that?
A. Yes.
Q. Okay. If we turn the page.
And Eric Bielen responds to this and says:
Dear Scott,
Do you see that?
A. Insightra.
Q. Insightra. Do you see that?
A. Yes, I do.
Q. Okay. And he is -- Eric Bielen is -- his
address is in Göteborg, Sweden, on this document,
correct?
A. He has a Getinge -- I mean, he has a Göteborg,
Sweden, address, but I know he lives in Belgium.
Q. Well, at least as of 2017, buyers were
concerned about liability for hernia mesh litigation
from Atrium's devices, correct?
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A. Yes, they were.
Q. Okay. I'm going to show you Plaintiff's
Exhibit 200, please. Excuse me, 120.
And would you agree with me that this is a
Zurich insurance policy that Getinge AB purchased?
A. It says policyholder, Getinge AB with Zurich.
An insurance policy, yes.
Q. Okay. And if we could look down, this is
products liability for mesh products?
A. Products liability for mesh products, yes.
Q. Okay. And who's the policyholder?
A. Getinge AB.
Q. And who's the insured?
A. It says the insured is Getinge AB, including
its subsidiaries in the USA.
Q. And what is the insured business?
A. Manufacturing, marketing, and sales of mesh
implants.
Q. Okay. And what is the limit of liability?
A. It says
Q. Okay. And if you would turn to Exhibit 122.
And if we could pull that up, Gina.
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A.
Q. Okay. And if you would go to the "whereas"
paragraph, does this appear to be for mesh product
liability insurance?
A. So it says: Whereas the mesh products is
covered under the insurance policies.
Yes.
Q. And if you would read out loud into the record
the next line, beginning with "the parties have."
A.
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Q. All right. I want to now talk to you a little
bit about your employment.
Yesterday when you were here, you testified
that your employment currently was with Vascular Systems
as well as Atrium and you mentioned a facility in
France. Do you recall that?
A. Can you rephrase that question? Sorry.
Q. Sure. Do you recall yesterday testifying that
you're the managing director of Vascular Systems?
A. I testified that I am the managing director of
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Vascular Systems.
Q. And you were asked a question yesterday, can
you explain why this agreement -- and if we could bring
up Exhibit 7?
You were asked: Can you explain why this
agreement was with Getinge Group instead of with Atrium
Medical?
Do you recall that question?
A. Yes.
Q. And I believe your answer was essentially that
you were managing director of Vascular Systems at the
time, so you also oversaw La Ciotat.
Do you recall that, approximately?
A. I don't recall that that's what I responded on
this particular document.
Q. Let me ask you --
A. I responded on the next document that we
reviewed.
Q. Let me ask you, this agreement is made on
November 1st, 2016, by and between Getinge Group and
Chad Carlton, right?
A. That is correct.
Q. And Getinge Group's not a legal entity, is it?
A. No, it is not.
Q. Okay. So you signed a contract with a
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nonlegal entity, right?
A. Yes.
Q. Okay. And if we look at your positions and
duties -- Position and Duties. Executive shall serve as
managing director of Hudson/Merrimack and as president
of Atrium Medical Corporation. Executive shall be based
in Merrimack, New Hampshire, reporting to Jens Viebke,
president, Acute Care Therapies, and shall have such
responsibilities and duties consistent with such
position. Executive acknowledges that Getinge may
reassign him to a different position in the company
based on business requirements.
Do you see that?
A. Yes, I do.
Q. Did I read that correctly?
A. Yes, you did.
Q. Okay. And you testified earlier today that
Acute Care Therapies is not a legal entity, correct?
A. Correct.
Q. All right. So Jens Viebke is president of an
entity that is not a legal entity, right?
A. Correct.
Q. All right. And Getinge, an entity which is
not a legal entity, may reassign you to a different
position in the company based upon its requirements,
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right?
A. Correct.
Q. Okay. And let's scroll down to the
Compensation.
In consideration of the agreements made by
executive herein and the performance by executive of his
obligations under, during the employment term, Getinge
agrees to pay executive pursuant to Getinge normal and
customary payroll procedures a base salary equivalent
to -- and I'm not going to say it because I don't know
that this needs to be in the record. The base salary
shall be subject to annual review, although any
determination to increase the base salary shall be
within Getinge's sole discretion.
Do you see that?
A. Yes, I do.
Q. Okay. So in consideration of the agreements,
the executive -- and that's you -- and the performance
of you under the employment agreement with a nonlegal
entity, Getinge, that nonlegal entity is agreeing to pay
you; right?
A. Yeah.
Q. Okay.
A. And they still do.
Q. Okay. And they -- the nonlegal entities
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reviews your base salary and adjusts it at its
discretion, correct?
A. Technically my boss does, yes.
Q. And, in addition, if we go down to the bottom,
under Standard Benefits: During the employment term,
executive shall be eligible to participate in the
employee benefits plans currently or hereafter
maintained by Getinge of general applicability to other
like executives of Getinge.
So here, this paragraph, they're saying that
the executive -- you can participate in plans maintained
by an entity that's not a legal entity, right?
A. It -- it's plans they've created as a group,
yeah.
Q. Okay. It's not a legal entity.
And to other executives of Getinge, which
isn't a legal entity, right?
A. Right.
Q. Okay. Let's turn the page.
Getinge's group medical, dental, vision,
disability, life insurance, and flexible spending
account plans are available to you, correct?
A. Yes.
Q. Okay. And so a nonlegal entity is binding
itself to provide you medical, dental, vision,
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disability, and life insurance under this contract,
correct?
A. And I happen to get life insurance, dental,
vision, all that.
Q. Okay. And the Getinge executive vehicle
program, you're entitled to a Getinge executive vehicle
under this agreement, correct?
A. Yes, but I don't utilize one.
Q. Okay. But you are entitled to one
nonetheless?
A. Yes, I am.
Q. Okay. And so a -- a nonlegal entity is
binding itself to giving you the option of using an
executive vehicle, right, under your contract?
A. As -- yes.
Q. Okay. Executive life and disability program,
here Getinge is offering you eligibility to participate
in their executive life and disability program, correct?
A. Yes, it is.
Q. Okay. And, again, this is a nonlegal entity
that's binding itself to giving you executive life and
disability, correct?
A. Yes.
Q. And if we turn to the back of this agreement,
on page 7, we see that this is signed by Jens Viebke,
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president of Acute Care Therapies. Do you see that?
A. Yes, I do.
Q. Okay. And, again, Acute Care Therapies is not
a legal entity, right?
A. Correct.
Q. Okay. And it's also signed by Thomas
Marschal, vice-president human resources, Acute Care
Therapies; correct?
A. Correct.
Q. Again, not a legal entity, right?
A. Correct.
Q. Okay. So these two gentlemen are signing and
binding a non- -- an entity that is -- that doesn't
exist?
A. Yes.
Q. Okay. I'd like to turn to Exhibit 41.
And this is the indemnity agreement that you
spoke about yesterday. If we could zoom in on the front
part.
Now, yesterday you testified, and I think a
moment ago you testified, that La Ciotat facility is a
separate entity and I think that's the explanation you
offered as to why Getinge was offering the
indemnification; is that right?
A. Yes. La Ciotat is Intervascular SAS.
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Q. Okay. So if we look at this indemnity
agreement in the first paragraph: Whereas the Getinge
Group, acting through its parent company, Getinge AB,
together with Atrium Medical Corporation, collectively
Getinge, desires Chad Carlton to serve as an officer and
director of Atrium Medical Corporation and Getinge
further desires to indemnify executive in accordance
with the terms and conditions of this indemnification
agreement.
Do you see that?
A. Yes, I do.
Q. And so if I understand, your testimony is and
from yesterday -- well, strike that.
I don't see La Ciotat in that first sentence:
Whereas the Getinge Group, acting through its parent
company, Getinge AB, and together with Atrium Medical
Corporation, desires Chad Carlton to serve as officer
and director of Atrium Medical Corporation.
Do you see the word La Ciotat in there?
A. No, because that's a city.
Q. Okay. Do you see the name of the -- the
vascular entity, the company?
A. No.
Q. Okay. In fact, it's nowhere in this
indemnification agreement, is it?
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A. No, it's not.
Q. Okay. So what this agreement says within the
four corners of the agreement is that Getinge AB,
together with Atrium Medical Corporation, desires
Chad Carlton to serve as an officer and director of
Atrium Medical, right?
A. Yes.
Q. Okay. It doesn't make any mention of any
other facilities, right?
A. Not the La Ciotat, nor the Wayne facility --
Q. Okay.
A. -- that I have products I oversee.
Q. So we have no proof other than your word that
this indemnification agreement is for anything other
than your job at Atrium, right? We have no documented
proof.
A. It's my indemnification agreement. I know why
I had it created.
Q. I'm not questioning that, sir, but I'm asking
within the four corners of the document, we have no
documentation to suggest that this is for what you've
said it was for.
A. Except for my word.
Q. Okay. We talked a little bit ago about
contracts and the importance of contracts. Do you
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recall that testimony?
A. The contracts -- are you meaning with selling
medical devices?
Q. Right. That's all --
A. Is that what you're referring back to?
Q. Do you recall that?
A. Yes, I do.
Q. And it's important when you're selling medical
devices, excuse me, when you're doing contracts that
they be accurate, right?
A. I -- I've learned that you always want to be
accurate, but I often find that contracts are not always
accurate.
Q. Okay. Well, I'm going to hand you or show
you -- and maybe I should hand you for the purposes of
this a paper copy because of the size of this exhibit.
Your Honor, may I approach the witness?
THE COURT: Yes.
A. Thank you.
Q. Sure.
Okay. So this is a distributorship agreement
that has been testified to as being the agreement that
sets out the deal that you have set forth on that easel;
is that right?
A. That easel is a general piece of the
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high-level standpoint. It is not the specific piece --
Q. Right. But this --
A. -- of transactions that take place, yeah.
Q. I understand. But this is the distributorship
agreement --
A. Yes.
Q. -- that governs --
A. Let me review before --
This is an agreement between Atrium and Maquet
Medical Systems. I'm not sure that I see -- and I'm not
completely familiar, I didn't read through this whole
document, but I don't see Maquet Cardiovascular LLC on
this.
Q. Well, that's because they're not on there.
This is the only distribution agreement prior
to the Getinge USA agreement that we'll get to that
later that was produced in this litigation and several
witnesses have testified about this agreement as being
the operative agreement. Do you disagree with those
witnesses?
A. If they are more familiar with the contract
than I am, I -- I don't know who those witnesses are
specifically.
Q. All right. So let me ask you, looking at
this, you would agree with me that if we look at the
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first paragraph, Atrium Medical Corporation, a Delaware
corporation and part of the Maquet Getinge Group,
hereinafter referred to as Maquet, and Maquet Medical
Systems USA, established at 45 Barbour Pond Drive,
hereafter Maquet SSU, hereby enter into the following
agreement.
Do you see that?
A. Yes, I do.
Q. Okay. And you would agree with me that this
legal entity is -- excuse me, this is not a legal entity
entering into this contract, true?
A. If it's Maquet Medical Systems USA, is it
USA -- is this the USA Sales that we say, Maquet Medical
Systems USA Sales LLC.
Q. Medical Systems isn't a -- isn't a legal
entity, correct?
A. No, but the -- in terms of Maquet Medical
Systems USA, maybe. I don't know. This is from
December 31st, 2012, so -- whereas that relationship
occurred in January of 2014.
So I'm just trying to -- I'm trying to mesh
this right now.
Q. All right. Well, there is no agreement from
2014.
A. Okay.
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Q. Have you ever seen an agreement from 2014?
A. I wasn't responsible in that area in 2014.
Q. Well, you testified about this relationship
yesterday, right?
A. Yes, I did.
Q. Okay. Can you show me anywhere in this
document where the profit of 50 percent going back to
Atrium is?
A. And, by the way, that's an approximate profit
that comes back and it depends -- I believe I said
yesterday it depends on the product line.
Q. But can you show me anywhere where that
document -- or this document shows those approximate
product profit lines?
A. I don't know that there's any prices
associated with this document.
Q. Okay. And if we look at the agreement, I want
you to turn to the signature page, on page 14. Do you
see this is dated December 31st, 2012?
A. Yes, I do.
Q. And what I want to do is I want to pull down
the bottom of this page, the document. How is it that
this document was created on April 17th, 2013, it is
dated and signed December 31st, 2012. Do you have an
answer for that?
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A. I do not have an answer for that.
Q. Okay. I'd like to turn to page 8. Excuse me,
page 7.
A. So, by the way, I did notice that it says
Maquet Cardiovascular LLC on the document that you kind
of showed down there.
Q. On page 8?
A. Down at the bottom --
Q. You can flip through it.
A. -- that you just showed me.
Q. Yes. Yes, it does, which is one of the
entities there.
A. Yeah, that's the first --
Q. And that doesn't match up with the entity that
is the signatory, correct?
A. Again, I don't know if there was any
transition or change. This was in 2012 versus 2013 or
'14.
Q. All right. Can we look at page 7, your
applicable law and jurisdiction.
So presuming it's Maquet Medical, a nonlegal
entity, this agreement is to be construed and governed
in accordance with the laws of state of Delaware.
Do you see that?
A. I'm sorry. Page 7 where?
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Q. I'm sorry. At the bottom, section 11.
A. Section 11. Okay.
Yes.
Q. Okay. And it lists a place of jurisdiction
and it lists that the adjudication will be in Delaware,
right, and depositions to occur in New Jersey?
A. Yes, it does.
Q. Okay. And then if we turn to page 8, on the
section 14, first paragraph, we see Maquet agreeing to
be bound by and adhere to the laws of the United States,
right?
A. Yup.
Q. Okay. If we turn to page 19, we see Medical
Systems Internal Guide and Getinge Corporate Manual.
Maquet acknowledges receipt and acceptance of the terms
contained in the documents referenced below.
And these are the Medical Systems documents,
right, the Medical Systems group?
A. Again, I'm not familiar with these, but I'll
take your word for it.
Q. Okay. So if you never saw a contract, how
were you able to describe that transaction yesterday?
Was that based on practice?
A. That was through discussions with Gary Sufat.
Q. Okay. So you have no personal knowledge of
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that?
A. He signed this contract, but that's his
explanation to me.
Q. Okay. And when your brother testified, he
said: I wouldn't say it was an agreement. It was their
integration plan. And they would -- they would pace out
what their SSUs, take over sales, so it just started
with one or two SSUs and then kept going. And so there
was -- it was an overall plan on when -- when the Atrium
teams would be -- would be handing off sales
responsibilities to the Maquet SSU.
And that's at page 207, lines 10 through 25 of
his deposition.
So would you agree with me that the
knowledge -- you're not professing to have more
knowledge than your brother, who was president at the
time, correct?
A. I -- I was aware in certain discussions in
terms of integration plans of various SSUs and the time
point. I think you probably found that in some of my
documents.
Q. When your brother says -- so as president of
Atrium business unit, did you have any involvement in
the discussions as to the terms of the distribution
agreement between Atrium and Maquet, page 213, line 16
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through 214 line 6, when he says: I don't recall, but I
don't think there were ever negotiations. I think it
was an agreement that was just required to properly
transfer the product.
Question: So when you say there weren't any
negotiations, is it your understanding that this is
something that Maquet put in place so that the products
could be transferred from Atrium to Maquet and then sold
by Maquet?
Answer: That would be my assumption.
You don't disagree with your brother, do you?
A. I disagree that we had no input on it. We set
transfer prices.
Q. Do you have personal knowledge of that?
A. That we set transfer prices?
Q. No. Do you have personal knowledge of the
negotiation of the contract?
A. Of the negotiation contract, no, but I have --
Q. Okay.
A. -- knowledge that we set transfer prices.
Q. Now, if we go back to Exhibit 2, that sales
agreement, there's -- there's nothing attached here that
is a price list.
A. I -- I stated that, yes.
Q. Okay. All right. Now, hopefully we can go --
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we're going to look at Exhibit 66 now, which is the
agreement that is in effect now, I believe.
You testified yesterday that as of October
1st, 2017, Atrium was now setting -- selling through,
ultimately, Getinge USA Sales; is that correct?
A. Through Maquet Cardiovascular LLC and then
through Getinge USA Sales.
Q. Okay. And if we look on the first paragraph
here on the first page, we see that this agreement is
effective October 1st, 2017, commencement date. And
that's consistent with what you testified to yesterday,
right?
A. That is correct.
Q. And it's consistent because you would want to
make sure that you had an agreement at the time -- you
don't want to sell a product -- strike that.
It's consistent and you wouldn't want to sell
a product without a contract, right, as president?
A. As -- as you're aware, they transitioned in
terms of their piece to another piece, so we were
putting a contract into place to reflect that.
Q. Okay. What I'd like to do is I'd like to turn
to the signature page. Your signature is -- can be
found on Bates ending 2732.
Okay. If we could zoom in, Chad Carlton, and
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that's dated 06 July, 2018, right?
A. Yes, it is.
Q. And you wrote that?
A. Yes, I did.
Q. So there's no contract from October 1st, 2017,
the commencement date, signed through to 6 July, 2018,
right?
A. There's no signed contract, no.
Q. Okay. So we can't find -- of the two sales
agreements, we can't find an accurate agreement that was
written without errors, can we?
A. I -- as I stated, and I think this probably
occurs in many different companies that what you want
and put in place may not always seem clear and concise.
We try our best.
Q. All right. Now, I want to now talk about the
sales service agreements. And I think you testified
that Atrium participates and receives some services
under these agreements, correct?
A. Yes.
Q. If we could turn to Exhibit 87, please.
A. Hang on one second.
Okay. Thank you.
Q. Okay. So if we look at the first page, this
is an agreement between Getinge AB and Atrium Medical
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Corporation, correct?
A. Yes, it is.
Q. Okay. And Getinge AB here is called the
provider, right?
A. Yes, it is.
Q. Okay. And then it says where is -- whereas,
excuse me -- provider and its affiliated companies
constitute a multinational group of enterprises and
recipient is a member of this group.
Do you see that?
A. Yes.
Q. And then it goes on to say: All companies of
the group have a continuing need for advice and
assistance in various areas, including finance,
information technology, human resources and management,
as set out in Annex 1.
Do you see that?
A. Yes, I do.
Q. Okay. And the service departments of provider
are staffed with highly experienced personnel and form a
valuable resource which can provide and coordinate a
variety of useful and beneficial services in the
above-mentioned areas to other companies of the group by
drawing on its own resources as well as on those
available from other companies in the group or from
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third parties.
Do you see that?
A. Yes, I do.
Q. And then it says provider is willing to render
to recipient -- so, in this case, it's Getinge AB -- is
willing to render to recipient -- and recipient being
Atrium -- and Atrium desires to use such services.
That's what this agreement says, right?
A. That's -- you've read it correctly, yes.
Q. Okay. Engagement of Provider. Recipient,
that would be Atrium, hereby engages provider, that'd be
Getinge AB, right --
A. Yes.
Q. -- okay -- to carry out such of the functions
as set in Annex 1 for the company as the recipient may
reasonably request and the provider shall agree to
perform from time to time.
Do you see that?
A. From time to time, yes.
Q. Okay. And these fees -- excuse me.
And we heard earlier, and I think we saw, that
there were fees associated with the services, correct?
A. Yeah, there are fees associated with the
services.
Q. Okay. And if we look at Terms and Termination
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on page 5, we can see that this agreement shall be
effective as of November 4th, 2011, right?
A. Yes.
Q. And that makes sense, because that's the time
of the closing of the acquisition by Getinge AB, right?
A. Yes, it does.
Q. Okay. What I'd like to do is turn the page
now and I'd like to zoom in on the signature and the
date.
So it appears that this agreement was
backdated by about two years, correct?
A. Well, I think he signed it on that date and it
reflected the contract earlier, yes.
Q. Okay. Thank you. You can put that aside.
I'd like to look at Plaintiff's 89.
Okay. So this is a replacement contract that
came in and this one, again, is between Getinge AB and
the parties listed in Annex 1. And Atrium is a party
listed in Annex 1, right?
A. Yes, it is. I would believe it is, yes.
Q. Okay. At this time, Atrium -- excuse me --
Getinge refers to itself as a pass-through entity,
right?
A. Yes.
Q. Otherwise, the process is roughly the same;
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Atrium -- excuse me, Getinge coordinates services for
the benefit of the recipients, right?
A. So -- right. Repeat that again. I'm sorry.
Q. So, otherwise, despite the name change from
provider to pass-through entity, the terms of this
agreement are basically the same.
A. I'm not familiar enough with the original
agreement and this agreement to compare them side by
side. The concept is the same, I would agree with you,
that they provide services and they serve as a -- as
Peter stated in his testimony, as kind of -- they would
collect the different invoices and charge that down to
us, depending on where it was.
Q. They also acted like a general contractor
almost, right, coordinating the services?
A. I -- I haven't worked with general contractors
enough to state if that's how they behave.
Q. All right. If you look at the last sentence
on the page: Pass-through entity shall provide the
services on a continuing basis without any further
specific request or whenever recipient places an order
for them with any of the group internal service
providers.
Do you see that?
A. Pass-through entity will, through the Getinge
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internal services provider, render the services to
recipients throughout the term of this agreement.
Pass-through entity shall provide the services on a
continuing basis without any further specific request.
So it's meaning it will continue on without
having to do multiple requests, yes.
Q. Okay. All right. And if we turn to page 4,
this agreement was signed on behalf of pass-through
entity by Joacim Lindoff on 3/1/2017. Do you see that?
A. Joacim, yes.
Q. Okay. If we turn the page, we see just a
little bit later, on 6 April, 2017, Steve Emery signs
for Atrium.
Do you see that?
A. Yes.
Q. And if we turn to page 12, we see: Acute Care
Therapies business support services include, but not
limited to, the following services.
So would you agree with me that these are the
types of services that Acute Care Therapies' businesses
would be able to receive?
A. Give me a second. Sorry.
Okay. I'm familiar -- yeah, they can provide
some of these, yes, different entities, including our
entity, yeah.
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Q. Okay. And so they provide market analysis,
right?
A. Yeah, we do that as well.
Q. Okay. They provide some global solutions
management, right?
A. Yeah.
Q. Commercial operations?
A. Okay. Yes.
Q. Okay. Finance and PMO?
A. Yeah. We do a lot of that internally, though.
Q. But you do receive some support, right?
A. Yeah, but it's local, so it's kind of a
different transaction.
Q. And you receive quality and regulatory
compliance assistance, correct?
A. Well, that -- again, that's internal, so there
may be things like some audits that we may get from
other individuals that would be crossed, but a lot of
those things are actually done internally to us.
Q. Okay. So both internal and external on those?
A. Yes.
Q. Okay. Going back now to page 4, again, just
to reorient us, this was signed on 3/1/2017, right?
A. By Joacim.
Q. Okay. I want to turn back to page 3.
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And this agreement is effective 1 January,
2016, about a year and two months earlier, right?
A. Yes.
Q. Okay. So we've now looked at four documents
that appear to be backdated today, right?
A. They're -- I just want to be careful with the
term backdating. They are -- they are dated and they
were in effect before that. Backdating has a very
negative connotation that you can't do in the medical
device industry.
Q. The dates on the documents were signed after
the effective date began?
A. Yes.
Q. All right. Now, you also talk about -- talked
about the organizational structure of Atrium. I want to
hand -- look at Plaintiff's 1, page 2.
This is the last org chart that I have been
provided with in the discovery in this case. I believe
this is from 2017. We used this in --
A. It's somewhat outdated.
Q. Right. I understand that, but --
A. Okay.
Q. -- I'm going to ask you, as of 2017,
Jens Viebke was president of Acute Care Therapies?
A. Correct.
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Q. And he was the boss, right?
A. Yes.
Q. Okay. And then there was you, Chad Carlton,
managing director, president, Atrium Medical
Corporation, right?
A. Correct.
Q. Okay. And then we see there's a -- if you
look at the bottom there, there are three little stars,
and they say not Atrium QMS, not on-site, right?
A. Correct.
Q. Okay. And we see that for chief commercial
officer, Acute Care Therapies, marketing, Ajey Atre.
Do you see that?
A. Correct.
Q. All right. And I just want to stop there for
a minute.
So Ajey's off-site and not an Atrium employee,
right?
A. Ajey is off-site and not an Atrium employee,
correct.
Q. Okay. Now, we talked earlier about Acute Care
Therapies, right?
A. (Nods head.)
Q. So Acute Care Therapies -- we've now seen that
Acute Care Therapies has a president, right --
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A. Yes.
Q. -- Jens Viebke?
A. Uh-huh.
Q. They have Thomas Marschal, vice-president of
HR, right?
A. You're referring to at this time, correct?
Q. At this time.
A. So at this time there was the creation of
that, yes.
Q. Okay. There's a chief commercial officer in
Ajey Atre, right?
A. Yes.
Q. Okay. And Gary Sufat was actually made the
CFO of Acute Care Therapies, right?
A. And he was also -- I believe at this time -- I
would have to know when Alistair was made CFO. But he,
I believe, was also CFO of Atrium at that time, too.
Q. Okay.
A. He had joint roles.
Q. Okay. But he held the position of CFO of
Acute Care Therapies, correct?
A. Correct.
Q. Okay. So Atrium -- so Acute Care Therapies,
though it's not a legal entity, we saw that it has
contracts, right? It signs contracts?
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A. Okay. Yes.
Q. Okay. And we saw that it has officers, right?
A. Yes.
Q. Okay. And we saw that the Getinge Group also
has officers, the GET team, right?
A. Yes.
Q. Okay. And we saw that the Getinge Group has
contracts like your agreement, right?
A. Yes.
Q. Okay. And you get paid pursuant to that
agreement, right?
A. I get paid by Atrium Medical, yes.
Q. You get paid pursuant to that agreement?
A. Yes.
Q. Okay. All right. Focusing back on Exhibit
2 -- excuse me, Exhibit 1 -- want to turn the page,
please?
And here this is HR, again back in 2007. So
we see -- I think this is -- '17, excuse me.
This is indicative of, I think, the -- the
shared services agreement.
We see Thomas Marschal, George Sanders,
Andreas Fagher, those three individuals. And Andreas
Fagher, if we could highlight.
So George Sanders not on-site, not an employee
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of Atrium, correct?
A. Correct.
Q. Okay. And that's the top of the HR food
chain, right?
A. George Sanders at this time --
Q. At this time.
A. -- yes.
Q. Okay. And underneath him was Andreas Fagher,
right?
A. Correct.
Q. Okay. And that's vice-president, human
resources, supply chain function, right?
A. Correct.
Q. Okay. And that was -- again, that person's
not on-site, right?
A. Correct.
Q. Matt Kelly, manufacturing consumables director
of HR, that person is on-site, right?
A. That is correct.
Q. Okay. So Matt Kelly's boss was -- that's a
direct line, solid-line report, right?
A. You also have other people who are on-site in
this piece.
Q. Right, I understand. I'm focusing just on the
Matt Kelly-Andreas Fagher relationship. That's a direct
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solid-line report, right?
A. At that time, that was a solid line and he had
a dotted line to me, correct.
Q. Okay. Solid-line means that that person is
the boss; they do their year-end reviews, that sort of
thing, right?
A. Yeah. Oftentimes on a dotted line I may have
some contribution to that.
Q. Okay. Thomas Marschal -- at this time, okay,
and today -- not an Atrium employee, not on-site, right?
A. Correct.
Q. And Nancy Michael, director of HR, Acute Care
Therapies, not on-site, right?
A. She's not on-site, no.
Q. Okay. Let's turn the page to information
technology.
Okay. And here we see two different chains
here, but we see Ludovic Batal, vice-president, group IT
operations, and Matthias Gelsok, chief information
officer.
Do you see those two individuals?
A. Yes, I do.
Q. Okay. Both not on-site and not Atrium
employees, right?
A. Correct.
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Q. Okay. And they have direct-line reports. So
the first person we see that appears to be on-site is
Tom McDonnell?
A. Yes.
Q. Okay. And he's VP of IT Operations for the
Americas, so he's on-site, but he also has off-site
responsibilities at this time, right?
A. Correct. So when we talk about shared
services, he's able -- some of his team contracts out
and sends some things to other sites as well as here,
so --
Q. Right. So when we talk about contacts under
the -- the -- those two contracts, the shared services
agreement, Atrium is both a recipient of services, but
then it also provides services back through the
contract, through Getinge AB, to other companies in the
organization, right?
A. That is correct.
Q. Okay. So, here, Tom McDonnell would be an
example of that, right?
A. Yes, he would.
Q. All right. Now, I want to look at Shen Lu,
vice-president, IS SSC Getinge, and at this point in
time, the next person down is an open position, right?
A. That's what it appears, yes.
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Q. Okay. All right. Let's now go to accounting
and finance.
All right. So Gary Sufat, chief financial
officer of Acute Care Therapies and was supervising
through a solid line Stephen Emery, right?
A. Yes.
Q. Okay. Now, we see over to the right,
Lena Hagman, EVP Quality -- group quality regulatory
compliance, and she's off-site, right?
A. Yes, she is. It's --
Q. She's a GET team member, right?
A. She is a GET team member, correct.
Q. Okay.
A. So that's -- she's on this because
Alistair Ryan not only reports to Stephen Emery, but
also reports out elsewhere within the organization. And
I believe at -- I don't know for sure, but I believe at
this time it may have been also to Lena.
Q. Okay. Colleen Hargove, director of finance,
budget analysis, also not on-site, not an Atrium
employee, correct?
A. Correct.
Q. Okay. And those two individuals have
functions related to remediation of the Atrium facility
and performance under the consent decree, correct? In
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terms of budgeting for that, on this.
A. Colleen does? I -- I don't recall Colleen
being involved in that. Alistair would.
Q. Okay. Alistair, too, not on-site?
A. No, Alistair is on-site.
Q. All right. Okay. We're done with this
exhibit.
Gina, can I have Exhibit 174. If we could
turn to page 4.
Earlier today when we were talking about mesh
liabilities and mesh lawsuits, I forgot to ask you this
question.
Atrium was aware -- Atrium had received a
letter in March of 2009, hadn't it -- and you can see
there's a lot of deposition testimony on this from
Mr. McNamara, so I'll represent to you that this letter
found its way to Atrium.
From LyondellBasell -- and LyondellBasell,
just for the Court, is the manufacturer of the
polypropylene used in the -- the C-Qur devices, is it
not?
A. To my -- it's the -- we usually say Basell,
but if it's Basell, I don't know the -- the right
terminology.
Q. Okay. And the manufacturer data sheet that
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comes with -- the safety data sheet, rather, that comes
with the polypropylene actually warns and has warned for
some time not to put in humans, correct?
A. The original data sheet said -- did not say
that.
Q. Okay. Well, in 2004 and 2005, individuals
from Atrium actually called the manufacturer and were
told not to use this in medical devices, were they not?
A. That part, I don't -- I'm not aware of.
Q. Okay. Well, I'm going to show you and we're
going to skip to it because I just brought this document
with me. This is a March 6th document from 2009.
And Atrium got this letter and we have a lot
of testimony. And it says: I'm writing this letter on
behalf of Basell, or Basell USA, a member of the
LyondellBasell Industries group of companies, because it
has come to our attention that certain users of Basell's
Pro-fax 6523 polypropylene resin -- and that's the resin
we just talked about that's in C-Qur, right?
A. It's the resin used for all of our
polypropylene.
Q. Okay.
That they may be utilizing this material in
implantable medical devices. Basell's very clear
policy, as expressed in our product data sheets -- and
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that's the one I was just referring to, right?
A. I -- I haven't seen the exact ones, but I'll
take your word for it.
Q. Okay.
Is that our materials, including but not
limited to Pro-fax 6523, are never to be used in FDA
Class III medical devices and may only be used in FDA
Class II medical devices with Basell's prior written
approval.
Do you see that?
A. Yes.
Q. Okay. And then it goes on to say: In
addition, it has been our long-standing policy that our
materials are not -- not -- to be used in implantable
medical devices, regardless of their FDA classification.
Atrium knows this as of 2009 the latest,
right?
A. According to this letter, that's -- that's the
case.
Q. Okay. All right. I'm going to move on from
there.
All right. Yesterday your counsel asked you
some questions about the consent decree. Do you recall
those questions?
A. Yes, I do.
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Q. I'd like to bring up Exhibit 209.
And we see that this is from the consent
decree. You can see the case here, Atrium Medical Corp.
vs. Maquet BV Holdings, Maquet Cardiovascular,
et cetera, and this is an unopposed motion to remove
Gail Christie from the caption of the consent decree and
substitute Lena Hagman.
Do you see that?
A. Yes, I do.
Q. Have you read this document before?
A. I don't know that I have read that document.
Q. Okay. Well, I want to look at the bottom of
the first page. It says: Ms. Christie has ceased to be
employed by or act on behalf of any of the corporate
defendants. So -- and substitute a new individual
defendant to the caption, Lena Hagman.
Do you see that?
A. I see that.
Q. Were you aware that Gail Christie represented
and was responsible for oversight of the consent decree
for all of the corporate defendants?
A. She -- yeah, the -- from a quality
perspective, yeah, her name was on the consent decree,
yes.
Q. Okay. So if we turn the page, I want to focus
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on paragraph 4.
Paragraph 30 of the consent decree provides as
follows, and I'm not going to read the whole thing. I'm
going to start midway through the bottom of the
paragraph, kind of in the middle, right here.
An individual defendant shall notify FDA
within 30 days after said defendant ceases to be
employed by or act on behalf of all the corporate
defendants.
So what this is saying is that Gail Christie
should notify FDA within 30 days after she ceases to be
employed by or act on behalf of all of the companies
that are listed on the front. Is that your
understanding as well?
A. That's -- my understanding is that the FDA
required that.
Q. Okay.
Once an individual defendant ceases to be
employed or otherwise act for all of the corporate
defendant entities, corporate defendants shall petition
the court to formally remove that individual's name from
the caption of this decree and the United States will
not oppose such motion, so long as -- so long as -- FDA
has sufficient evidence or information that the
individual defendant to be removed is no longer directly
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or indirectly working with or in any way -- this goes
onto the next page -- influencing corporate defendant
entities.
Do you see that?
A. Yes, I see that.
Q. Okay. It then goes on to say, starting here:
United States will not oppose such motion so long as FDA
has sufficient evidence or information that the Christie
substitute defendant is vested with responsibility for
all quality system functions as described in paragraph
12.
So this is saying that -- that all of the
quality system functions have to be vested in this
replacement personal defendant, right?
A. That is the case, yes.
Q. Okay. Let's turn to page 4, paragraph 9.
Lena Hagman is now the individual vested with
responsibility for all quality systems for the corporate
defendants.
And that is a defined term, right? That means
all of the corporate defendants, including Atrium,
right? Correct?
A. Correct.
Q. Okay.
As described in paragraph 12 of the consent
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decree. Accordingly, and solely -- solely -- because
she has that responsibility by reason of her position as
executive vice-president for quality regulatory
compliance, the corporate defendants hereby petition the
court to substitute Gail Christie with Lena Hagman,
whose substitution will satisfy both the Christie
substitute defendant and substitute individual defendant
provisions of paragraph 30 of the consent decree.
Do you see that?
A. Yes, I do.
Q. Okay. And I want to look at the last
paragraph -- the last sentence of paragraph 10.
THE COURT: We're going to take our break
after you --
MR. ORENT: Absolutely.
THE COURT: -- finish this.
Q. And do you see where it says Ms. Hagman
consents to giving this court personal jurisdiction over
her?
A. Yes, I see that.
Q. Okay. And I want to just scroll to the
caption page here. If we could go to just the front
page, please, Gina, and scroll up here.
What court is that?
A. United States District Court of New Hampshire.
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Q. And where are we today?
A. United States District Court. I mean United
States District Court, District of New Hampshire.
MR. ORENT: Okay. Your Honor, now's a good
time for that break.
THE COURT: Okay. Good. We'll take our
break. We'll be back --
MR. ORENT: Thank you.
THE COURT: -- at close to 10:30.
(Recess taken from 10:20 a.m. until 10:38 a.m.)
THE COURT: Go ahead, Attorney Orent.
Q. Mr. Carlton, yesterday you were asked some
questions by your counsel and I'm just going to
paraphrase briefly, but I believe you testified roughly
that Atrium is responsible for the production of the
C-Qur mesh devices; is that right?
A. Yes, it is.
Q. I believe that you testified that Atrium is
the one that is responsible for the design of the C-Qur
devices, right?
A. Yes, we are.
Q. And I believe you testified that you were
responsible for the -- you being Atrium -- were
responsible for the quality systems related to the C-Qur
devices, right?
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A. Yes, we are.
Q. And also the packaging of the C-Qur mesh
devices, correct?
A. That is correct.
Q. Okay. What I'd like to do is I'd like to turn
to Exhibit 184. And, again, this is a copy of the
consent decree.
And if you look on page 5, it says here:
Specifically, defendants shall take the following
actions, among others; number one, establish and
maintain procedures to control defendants' devices'
designs in order to ensure the specified design
requirements are met.
Would you agree that establishing and
maintaining procedures to control the design of C-Qur in
order to ensure that the specified design requirements
are met is part of the design of the device?
A. Can you repeat that question for me?
Q. Sure.
A. Sorry.
Q. If you look at paragraph -- the first
paragraph there, would you agree that establishing and
maintaining procedures to control design in order to
ensure that specified design requirements are met is an
obligation of a medical device manufacturer?
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A. So we -- we are required to maintain the
design procedures and -- yes, we are -- that is
something we are required to do.
Q. Okay. And would you agree with me under the
consent decree that Lena Hagman is personally, in her
official capacity, responsible to make sure that
defendants establish and maintain procedures to control
defendants' devices' designs in order to ensure that
specified design requirements are met?
A. I believe she gave that responsibility to me
locally.
Q. Do you see anywhere in the consent decree
where she can assign away that responsibility?
A. I would have to read through further, but I
believe she has the power to do that through regulations
in terms of creating a local designate.
Q. Let's quickly move to -- you'd be a local
designate, not the ultimate responsible party, true?
A. I am the management with authority and within
the FDA that has a specific connotation associated with
it.
Q. All right. Let's -- let's turn to paragraph
12.
Corporate defendants shall vest responsibility
for all quality system functions, as designed -- as
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defined in 21 C.F.R. 8020.3(v)(sic) in the specified and
additional facilities an individual who shall be
authorized and responsible for all quality system
functions at the specified and additional facilities,
including establishing, implementing, and maintaining a
comprehensive written program -- quality program -- to
ensure defendants' continuous compliance with this
decree, the Act, and the QS, CR, and MDR regulations.
As you sit here today, you understand that
Lena Hagman is that individual, correct?
A. She has the overall responsibility and she has
vested -- she has provided that responsibility to me
locally, yes.
Q. Okay. But it's her name that's on the
caption?
A. Huh?
Q. Her name is the one that we looked at on the
caption.
A. Well, on this particular one she's not, but on
the other one she is.
Q. Right. And that document -- and we can look
back at Exhibit 209 -- that document says that she's
being substituted in place of Gail Christie, right?
That's what we saw.
A. Correct.
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Q. Okay. So this document doesn't say your name,
does it?
A. It does not have my name, no.
Q. Okay. Document 209 does not have your name?
A. No, it does not.
Q. Okay. Your name has not been submitted by
Lena Hagman for approval to the FDA for substitution of
her, has it?
A. No, it's -- it's documented locally that I am
the management with responsibility, though.
Q. You are the local management responsibility,
but ultimately she is the party on the consent decree.
You agree with that?
A. She is a party on the consent decree.
Q. Okay.
A. And Atrium Medical is as well.
Q. All right. Let's go back to page 6.
Do you agree with me that a manufacturer of
medical devices has an obligation to ensure that all
devices meet requirements for design, development, and
planning? Do you agree with me that?
A. We -- yes.
Q. And would you agree with me that a medical
device manufacturer in the design process has design
planning as part of it?
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A. Are you meaning the next bullet or --
Q. No, I'm asking you a question.
A. Okay.
Q. Would you agree with me that part of the
design process is design development and planning?
A. Design -- can you elaborate planning?
Q. In the way the FDA uses it.
A. So it -- in terms of design, design and
validate the product, yes, absolutely.
Q. Okay. Design inputs, design outputs, design
review, those are all functions that a medical device
manufacturer has obligations for under MDR regulations,
correct?
A. Absolutely.
Q. Okay. Design verification, a medical device
manufacturer has to do that, right?
A. Yes.
Q. Okay. Design validation, a medical device
manufacturer has to do that, correct?
A. Yes.
Q. Design change, design transfer, those are
things that medical device companies have to do,
correct?
A. Yes, they do.
Q. And as well as maintain a design history file,
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correct?
A. That's correct.
Q. And Atrium -- strike that.
All of this work has been done for the C-Qur
device, correct?
A. Correct.
Q. Okay. And Lena Hagman, via the consent
decree, has personal responsibility for each of those
under this decree; isn't that right?
A. She has personal responsibility for that -- I
think that would be a stretch.
Q. Well, don't you see here it says:
Specifically, defendants shall take the following
actions, right?
A. And Atrium is one of those defendants.
Q. Right. But that's plural, right? If we look
back -- let's go back to page 1.
The term defendants is a defined term and if
we look here, we can see it. We can see that it's both
the corporate defendants and the individual defendants,
right?
A. Yes.
Q. Okay. So if we go back to page 5, the way a
defined term works is that another way to say that would
be specifically the corporate defendants and the
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individual defendants shall take the following actions,
among others.
Would you agree with that?
A. Specifically the defendants shall take the
following actions, among others.
Q. Right. And in place of the defined term,
defendants, we could use the individual definitions that
were given; we could say specifically the corporate
defendants and the individual defendants shall take the
following actions, among others. Isn't that right?
A. I guess so, yes.
Q. Okay. Now, if we go to number 2, excuse me,
number 3: Conduct design evaluations of all marketed
devices to ensure that current designs have been
properly validated and transferred into appropriate
product specifications.
That's something that a manufacturer of
medical devices has to do, correct?
A. Yes. Yes.
Q. In fact, that's -- that was done with C-Qur,
correct?
A. Yes, it was.
Q. And under the consent decree it was redone to
make sure that you were compliant with the consent
decree, right?
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A. I -- I think it was redone prior to the
consent decree.
Q. Okay. Through the regulatory process, the
483 process?
A. Yes.
Q. Okay.
A. The 483 process?
Q. You understand that there were a series --
strike that.
All right. Let's go on to the next sentence.
Number 4, can we bring that back up, Gina?
Validate processes whose results cannot be
fully tested by subsequent inspection testing. Still on
page 6. Right here. Right there. Thank you.
Do you see that?
A. Yes, I see that.
Q. And that's a responsibility of a medical
device manufacturer, correct?
A. Yes, it is.
Q. And it was placed in here as a -- something
that needed to be done under the consent decree as well,
correct?
A. Yes.
Q. Okay. If we go down here to number 5,
develop, conduct, control, and monitor production
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processes, ensure the devices conform to their
specifications.
That is a -- something that needs to be done
with medical devices, correct?
A. That is something in the regulations, yes.
Q. Okay. And Atrium has done that?
A. Yes, it has.
Q. Okay. And it's been done with regard to the
C-Qur device, correct?
A. Yes, it has.
Q. Okay. And that is part of manufacture,
correct?
A. That is part of -- part of the whole process
of design and developing and manufacturing a product,
yes.
Q. Okay. 6, establish and implement adequate
written procedures to control devices that do not
conform to specified requirements.
Do you see that?
A. Yes, I do.
Q. That's a requirement of all medical device
manufacturers, correct?
A. Correct.
Q. Atrium did that with regard to the C-Qur
device, correct?
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A. Yes, it has.
Q. And it was required under the consent decree,
correct?
A. It's required of the -- they're referring to
the C.F.R. earlier in this and, yes, it's part of the
regulations and it's part of the consent decree, yes.
Q. Okay. 7: Establish and maintain adequate
written procedures for corrective and preventative
actions, documenting those activities.
That is a requirement of medical device
manufacturers, correct?
A. That is a requirement of the medical device
manufacturers, yes.
Q. It was done for the C-Qur devices, correct?
A. Yes.
Q. And it's in the consent decree, correct?
A. Yes.
Q. Okay. 8: Maintain accurate and complete
complaint files and establish and implement adequate
written procedures receiving, reviewing, and evaluating
complaints.
Do you see that?
A. Yes, I do.
Q. That's a requirement of medical device
manufacturers, correct?
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A. As mentioned earlier, yes.
Q. Okay. That was done for C-Qur, correct?
A. Yes, it was.
Q. And it's required under the consent decree,
correct?
A. Yes, it is.
Q. Okay. Number 9: Develop and implement
adequate written MDR procedures in compliance with
21 C.F.R. part 803, including but not limited to
adequate procedures for management review and ensure
that employees are trained on, understand, and properly
implement the MDR requirements and procedures.
Do you see that?
A. Yes.
Q. And that's required of medical device
manufacturers, correct?
A. Yes, it is.
Q. It was done with C-Qur, correct?
A. Yes, it was.
Q. And it's required under the consent decree,
correct?
A. Yes, it is.
Q. Okay. Gina -- okay. If we could bring up
page 125 from yesterday and focus on line 6 through 14,
please.
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Yesterday --
MS. ARMSTRONG: I'm sorry. What is this
document?
MR. ORENT: This is the transcript from
yesterday.
MS. ARMSTRONG: Okay.
Q. Yesterday you were asked: Is it unusual to
distribute retained earnings to a shareholder?
And you stated: No. In fact, when Atrium
existed -- when Atrium existed, they sent earnings to
shareholders as well.
Then your counsel went back and said: When
you say Atrium existed, you mean prior to the --
And you said: Oh, I'm sorry. Let me correct
that. When Atrium was a privately held company, they
did the same thing.
That was your testimony yesterday, correct?
A. Yeah. It was an error.
Q. Let's go to Exhibit 238 and let's scroll in
under Maquet Vascular Systems.
This is your CV, correct?
A. Yes. We reviewed this quite extensively
during my deposition.
Q. Okay. And I want to focus right here on your
description of Maquet Vascular Systems. You said it's
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formally Atrium Medical Corporation on your resume, did
you not?
A. Yeah, and we discussed this at length.
MR. ORENT: I have no further questions.
Thank you, your Honor.
THE COURT: Okay.
MR. ORENT: Thank you.
MS. ARMSTRONG: Give me just a minute to get
organized and find the pages --
THE COURT: That's fine.
MS. ARMSTRONG: -- in the consent decree that
he was referring to.
MR. ORENT: Your Honor, if I may, just one
housekeeping item.
Formally move in Exhibits 239 through 242 and
237 and 238 and 243.
THE COURT: Okay. I don't know what those
exhibits are, but do defendants have any objection to
them?
MR. CHABOT: Your Honor, provided we have the
opportunity to address them on the exhibit list so that
they can be subject to the stipulation that Attorney
Orent read at the beginning of the hearing --
THE COURT: Okay.
MR. CHABOT: -- I think that would be fine.
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THE COURT: All right.
MR. ORENT: Thank you, your Honor.
THE COURT: So with that qualification, they
are full exhibits. 239, 242 --
MR. GLASSER: Do you want to read those to her
again, Jon?
MR. ORENT: Yes.
THE COURT: -- as well as 237, 238 and 243.
MR. ORENT: Correct. 239 through 42, 237,
238, and 243.
THE COURT: 237 to 243.
(Plaintiffs' Exhibits No. 237-243 admitted.)
MR. CHABOT: Counsel, if you'll provide an
exhibit list so that we can make any objections and
we'll have them --
MS. ARMSTRONG: Your Honor, I just -- Mr. --
Mr. Orent was going through the consent decree pretty
fast. Can I just get him to point me to the pages,
actual pages, in the paper copy that he was reading
from?
THE COURT: Absolutely.
MS. ARMSTRONG: Just show me. I was reading
on the screen.
MR. ORENT: It's starting on 5 and then 6.
MS. ARMSTRONG: Thank you.
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MR. ORENT: You're welcome.
REDIRECT EXAMINATION
BY MS. ARMSTRONG:
Q. Good morning, Mr. Carlton.
A. Good morning, Ms. Armstrong.
Q. Do you remember Mr. Orent just now asking you
some questions about pelvic mesh litigation?
A. Yes, I do.
Q. And he threw out some very, very big numbers
that have been in the news, right?
A. Yes.
Q. Was Atrium's products, surgical mesh products,
were they ever marketed for pelvic use?
A. No, they were not.
Q. Is that a very different use than hernia --
than use in hernia surgery?
A. Yes, it was.
Q. Is it one of the indications for your surgical
mesh products?
A. No, it is not.
Q. Do you -- do you know how many -- how many
pending litigations you have that involve the -- the use
of one of your surgical mesh products in a pelvic
application?
A. I don't know the exact number, but it's --
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it's less than probably two percent or one percent of
the total --
Q. Okay.
A. -- litigation, of the lawsuits that are out
there. Sorry.
Q. Do you have any idea -- I'll stop there.
You were also shown an email from Scott Waxler
in February of 2017. Do you recall that?
A. I recall seeing that here, yes.
Q. And who is he --
A. I had not seen it before.
Q. Who is he with?
A. He is with LockeBridge.
Q. And it was concerning the mesh litigation; it
was a question about the mesh litigation, correct?
A. There was a question on the mesh litigation,
yes.
Q. And it was -- I believe that the document was
dated February 2017. Do you recall that?
A. Yes, I do.
Q. Do you know when the C-Qur MDL was created?
A. It was just prior to that time, I believe.
Q. Okay. You were also shown a response to -- or
I think it was an interim response to the FDA regarding
your complaint review procedure and whether or not some
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should have been reported as MDRs, correct?
A. That is correct.
Q. Okay. You -- you told us yesterday about your
postmarket surveillance and you said it included review
of complaints, right?
A. Yes.
Q. Do you review complaints for postmarket
surveillance regardless of their status as MDRs or not?
A. Absolutely. We -- we had filed -- so -- so
within that particular item related to the -- the 483,
we had actually had all of those complaints. We looked
and the particular auditor had a different viewpoint on
filing and there is some differences, not only within
interpretation of the regulations, but different medical
device manufacturers will report things in different
ways.
Q. Okay. Have -- had you already included those
complaints -- whether reported as MDRs or not, have they
already been reported in your risk analysis for the
product?
A. Yes, they are also part of our complaint
system. They were part of things that we analyzed. It
was just not something that was submitted and filed with
the FDA.
Q. And -- and -- and did your risk analysis
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change because some then were reported to the FDA as
MDRs?
A. No, it's not -- when we do our analysis, it's
not related specifically to that MDR versus not MDR.
Q. And had you noticed anything unusual in
complaint reporting patterns that created any kind of
alert to you about concerns about your surgical mesh
products or specifically the C-Qur products?
A. No.
Q. Mr. Orent asked you if you were covered by
some of the group insurance plans. Do you recall that?
A. Yes, I do.
Q. Is there a reason why an organization would
try to get coverage -- group insurance on the largest
scale possible?
A. Yeah, it -- it's less expensive typically.
Q. Would you explain again what your role is as
the managing director -- I think I'm -- I may be
misstating your title, so correct me if I'm wrong, but
would you explain your role again as the director of
Vascular Products?
A. You mean in my history?
Q. No, just describe what your responsibilities
are, please.
A. Oh, from -- as managing director of Vascular
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Systems. So I oversee the -- you know, the design,
development, production of not only the Atrium, but also
look to the -- from a marketing perspective and the
strategic side, the three- to five-year plan for all the
vascular products.
And I oversee La Ciotat, where those vascular
products are manufactured as well.
Q. And is it a product line responsibility or is
it -- is it primarily a product line responsibility or
is it a site responsibility?
A. So primarily it's a product line
responsibility overseeing those. I mean, I do have the
managing director of La Ciotat who reports in to me.
Q. Do they make any products other than vascular
products?
A. No, they do not.
Q. So you -- but you also -- vascular -- you said
also the vascular products were made by another entity,
right?
A. Cardiovascular LLC -- Maquet Cardiovascular
LLC down in Wayne, New Jersey, yes.
Q. Do they make -- do they make other products?
A. They make many other products, yes.
Q. Do you have any responsibility for them, other
than for the vascular products?
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A. No, I do not, and I do not oversee any of the
individuals there.
Q. So when Getinge AB undertook to indemnify you,
was that in part because of your role for this product
line?
A. Yes. It extended to multiple entities, yup.
Q. Can we pull up Exhibit 122 for a minute?
Maybe more than a minute, but let's pull up 122.
Are you familiar with this document?
A. I was not --
Q. Can we blow it up a little bit?
Are you familiar with this document?
A. I was not familiar with it prior to -- to this
litigation, no.
Q. Is Atrium Medical Corporation a party to this
agreement?
A. No, it is not.
Q. To your knowledge, does Atrium Medical
Corporation have any ability to enforce this agreement
or to go to Getinge AB and do anything with respect to
this agreement?
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A. No.
Q. Has Getinge AB ever agreed with Atrium AB that
it's going to indemnify you, Atrium AB, for the -- I
mean Getinge. Has Getinge AB ever agreed that it's
going to indemnify Atrium for these liabilities in this
litigation?
A. No.
Q. Mr. Orent asked you about the fact that your
employment agreement is with Getinge Group. That's not
technically a legal -- you don't disagree that it's not
a legal entity?
A. No, I don't disagree with that.
Q. You get a paycheck every -- periodically?
A. I have learned that agreements are much more
about trusting the person and interacting with a person
that you're involved with there for employment
agreements. So --
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Q. How often do you get a paycheck?
A. I get a paycheck, I believe, every two weeks.
Q. And who issues that paycheck?
A. Atrium Medical Corporation.
Q. And what is your understanding of who your
employer is?
A. Atrium Medical Corporation.
Q. Are there occasions -- you're pretty busy in
your work, aren't you?
A. I am, and being here for three days has taken
me away from a lot of that, yes.
Q. And all of your managing directors and your
direct reports are pretty busy, right?
A. Yes, they are.
Q. Is it -- is it not necessarily ideal, but is
it unusual where transactions get ahead of the
paperwork?
A. It -- it happens more frequently than I would
like. But, yes, it happens frequently, yeah.
Q. And when you do create a contract that
represents a transaction that's been going on for a
while --
A. Uh-huh.
Q. -- and that contract references an effective
date, what is the effective date?
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A. The effective date is when that contract
states.
Q. Or does it -- does the effective -- when the
activities predate the actual creation of the paper
contract, what does the effective date represent?
A. It is the date that those activities started.
Q. And when you sign it, do you sign it as of the
effective date or do you sign it on the date that you
actually sign it?
A. I always sign on the date that I am signing.
I never backdate.
Q. What is your understanding of what backdating
means?
A. Backdating is when you actually write down a
date of a prior date than the day that you're actually
signing something. And that is an extreme no-no in our
business.
Q. In any of the documents that you've seen while
you've been here these past three days, have you seen
any documents that were backdated?
A. No, they were not backdated. They took --
they were signed after the effective date.
Q. Can we put up Exhibit 174, please, Plaintiff's
Exhibit 174.
This was the email about the Basell resin; is
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that correct?
A. I was not shown this earlier portion, so I --
Q. Can we scroll to the part that the witness was
shown?
Jon, do you remember what page it was?
MR. ORENT: I believe it's page 4.
MS. ARMSTRONG: Page 4.
MR. ORENT: 4, I believe. It's the next page.
There it is.
Q. Okay. Is this what you were shown by
Mr. Orent?
A. Yes, it was.
Q. Has Atrium done its own testing to determine
the appropriate materials to use in its products?
A. Yes, just -- that is one of the key things
that we do when we're selecting suppliers, and we will
do our testing on the different materials that we
receive.
Q. And did Atrium satisfy itself that the resin
that it was using was the appropriate resin to be used?
A. Yes, we did.
Q. And that was done by Atrium or by Getinge AB?
A. That was done by Atrium.
Q. Okay. You can put this document away.
Is Atrium part of Acute Care Therapies?
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A. Atrium is, yeah, one of the businesses that
are within Acute Care Therapies.
Q. You explained that to us yesterday.
A. Yup.
Q. Does Acute Care Therapies have officers?
A. It -- it does. It has a president. It also
has a chief marketing officer, technology officer, and
chief operating officer.
Q. Are those officers -- Acute Care Therapies is
not a legal entity, correct?
A. Correct.
Q. Are those officers employed by other legal
entities within the Getinge group of companies?
A. Yes, they are.
Q. Are they -- are those officers employed by
Getinge AB?
A. Not to my knowledge, no.
Q. The org charts that Mr. Orent showed you, are
those consistent with the fact that there's this layer
of Acute Care Therapies?
A. The org chart that he showed, no.
Q. Okay.
A. I mean -- wait.
Q. Did he show you org charts that showed other
people above Atrium on the org charts?
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A. Yes.
Q. Were they generally officers of Acute Care
Therapies?
A. He showed a couple of different charts.
The -- Jens is the -- he was an officer; Ajey was an
officer. The other individuals that they stated were
not officers of ACT, to my knowledge.
Q. Okay.
A. Yup.
Q. Okay. But does anything on the org charts
that he showed you change anything that you testified to
yesterday about who manages and directs the day-to-day
operations of the company?
A. Not at all.
Q. And, in fact, yesterday you explained -- would
you explain -- I think you told us about the reporting
structure for regulatory. Would you -- regulatory and
quality. Would you explain that again?
A. So we have a director of quality who reports
in to John Costello, who is the vice-president of
corporate compliance and -- sorry, corporate quality and
compliance.
And then you have a senior manager on-site who
reports up to the director of regulatory and -- the
director of regulatory in Maquet Cardiovascular LLC.
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Q. And tell us again when that structure came
into play?
A. So that structure came into place
essentially -- it was prior to my taking over as
president, but it occurred after the consent decree in
the roughly late 2015, early 2016 time frame.
Q. And -- and why is that structure created?
A. So part of it was as the consent decree, but
it also provided greater oversight.
Q. But in terms of the day-to-day operations that
you described managing -- reporting MDRs to the FDA,
preparing 510(k) applications to the FDA, how were those
managed by Atrium?
A. That's still managed internally locally at
Atrium.
Q. And is anything in the org charts that
Mr. Orent showed you today inconsistent with what you
testified to yesterday about the regulatory structure?
A. No, not at all.
Q. Can we put up 1 -- Plaintiff's Exhibit 184,
the consent decree.
This is the consent decree, correct?
A. Yes, it is, to my knowledge.
Q. Is Getinge AB a party to this consent decree?
A. Getinge AB, no, it is not.
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Q. There are -- there are four corporate
defendants, correct?
A. Yes, there are.
Q. So there's Atrium Medical Corporation, Maquet
Holding BV and Company KG, Maquet Cardiovascular LLC and
Maquet Cardiopulmonary AG; is that correct?
A. Yes, it is.
Q. Can we turn to page 5, please, paragraph 5A.
Actually, paragraph -- let's look at paragraph 5.
It says: Except as provided in paragraphs 6
and 11, defendants and each and all of their directors,
officers, et cetera -- and it goes on to list some
responsibilities for defendants, correct?
A. Yes, it does.
Q. And Atrium was a defendant to this consent
decree, correct?
A. Yes, it was.
Q. And does Atrium have responsibilities pursuant
to this consent decree?
A. Yes, it very much does.
Q. Now, I think Mr. Orent suggested to you that
by use of the term defendants here, the FDA intended
that all of the defendants would be responsible for all
of these activities at all of the sites covered by the
consent decree. Is that consistent with your
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understanding?
A. I -- as I said to you earlier, I think Atrium
is a defendant and it's responsible for its entity.
Q. Well, for example, do you think the FDA
intended Atrium to be responsible for the design of
products in Rastatt, Germany?
A. No, it did not.
Q. Do you think that's what it intended by the
word defendants?
A. No, it did not.
Q. Do you think it intended Atrium to be
responsible for Atrium's activities?
A. Yes, it did.
Q. Did the Atrium -- did the FDA insist that
there be a -- because there were multiple sites
involved, did the FDA insist there be an individual or
individuals named in the complaint that would have
overall oversight responsibility?
A. Yes.
MR. ORENT: Objection, personal knowledge.
Q. Do you have personal knowledge of the consent
decree and how it's been implemented?
A. I do.
Q. Okay.
THE COURT: Okay. Overruled.
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A. I have -- would you like me to elaborate?
Q. So I just want -- no, you don't have to.
A. Okay.
Q. Did the -- the FDA insist that there be an
individual or individuals that have to have oversight
responsibility because there were multiple sites?
A. Yes.
Q. Okay. And were -- did those individual or
individuals delegate responsibility to you for the
Atrium sites?
A. Did they delegate to me for -- repeat that
question. I'm sorry.
Q. Okay. Did those individuals -- were you
delegated responsibility for the Atrium sites?
A. Yes.
Q. And was that consistent with the consent
decree?
A. Yes, it is.
Q. Was it consistent with the federal regulations
governing the medical device manufacturers?
A. Yes.
Q. And I think we saw yesterday that you were
named the managing director of the Atrium sites with
full executive authority.
A. Correct.
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Q. Can we pull up Exhibit 166. I'm sorry,
Exhibit 66. I apologize.
That's not it. The Exhibit 66 that was used
by Mr. Orcutt (sic) just now. It's Defendant's Exhibit
66.
What is this document?
A. This is the distributor agreement between
Atrium Medical, Maquet Cardiovascular LLC, and Getinge
USA Sales.
Q. Okay. Now, this has three entities in it,
correct?
A. Yes, it does.
Q. And you're familiar with this structure and
this distribution arrangement, correct?
A. Yes, I am.
Q. Now, if we substituted -- now, yesterday I was
asking you questions that were limited to 2014 through
2017, correct?
A. Uh-huh.
Q. If we substituted Getinge USA Sales for Maquet
Cardiovascular US -- USA Sales in that chart, would that
be the current structure?
A. That is, yes.
Q. And that's your understanding of how the
structure is?
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A. Yeah. And I -- as I stated, if an agreement
doesn't fully outline it, I know how the structure
actually works.
Q. Okay. And is it your understanding that prior
to Getinge USA Sales that point in the chart was
occupied by Maquet Cardiovascular USA Sales?
A. Yes.
Q. Now, you said you spoke to Gary Sufat about
that. Do you have a general understanding of how the
distribution works?
A. Yes, I know where my products go. I know the
bases and where we ship them, yes.
Q. As the president of the company, you have a
general understanding of this?
A. Yes.
Q. Why did you speak to Mr. Sufat?
A. I wanted to just get a greater understanding
of the -- the financial transactions going back and
forth. I -- I had the general overview and I wanted to
make sure that I was correct with -- with my statements.
Q. Are you aware that Mr. Sufat has given an
affidavit in this litigation?
A. I am aware, yes.
Q. Can we put up Mr. Sufat's affidavit?
And if we look at paragraph 9, please, it
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says: Since January 1, 2014, Atrium has transferred its
products to Maquet Cardiovascular LLC, a distribution
center, at standard cost. Maquet -- MCV LLC is an
indirect wholly owned subsidiary of Getinge AB.
Have I read that correctly?
A. Yes, you have.
Q. Is that consistent with your understanding?
A. That is my understanding, yes.
Q. Have you heard any testimony from a fact
witness in either the depositions that were played or
any other -- any fact witness testimony in this
litigation -- not Mr. Messina's, but any fact witness
testimony in this litigation that contradicts
Mr. Sufat's testimony?
A. No.
Q. And he would know?
A. Yes.
Q. Let's look at paragraph 10.
From January 1, 2014, through September 30th,
2017, MCV LLC then sold --
MR. ORENT: Your Honor, I'd like to object
that this is hearsay. This is an available witness.
THE COURT: I'm going to overrule --
MS. ARMSTRONG: It's redirect, your Honor. He
was crossed about this.
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Q. From January 1st, 2014, through September 30,
2017, MCV LLC then sold to Atrium products at a markup
to Maquet Cardiovascular US Sales LLC, MCV US Sales,
at -- a sales entity. MCV US Sales is an indirect
wholly owned subsidiary of Getinge AB.
Have I read that correctly?
A. Yes, you have.
Q. And are you aware of any facts that have been
presented in this -- in this hearing that contradict
this?
A. No, it's consistent with what I discussed
with -- with Gary, yes.
Q. And is it consistent with your general
understanding as the president of the company?
A. Yes.
Q. Paragraph 11: From October 1 through 2017,
MCV LLC then sold the Atrium products at a markup to
Getinge USA Sales LLC, a sales entity. Getinge USA
Sales LLC is an indirect wholly owned subsidiary of
Getinge AB.
Have I read that correctly?
A. Yes, you have.
Q. And, again, is that consistent your with
understanding as the president of the company?
A. Yes, it is.
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Q. And have you heard anything in the hearing so
far that contradicts Mr. Sufat's personal knowledge of
this?
A. No, nothing.
Q. And then in paragraph 12, it says: The
distribution center MCV LLC earns approximately half of
the margin and the sales entity MCV US Sales, now
Getinge USA Sales LLC instead of MCV US Sales, earns
approximately half the margin.
Have I read that correctly?
A. Yes, you have.
Q. And, again, is that consistent with your
general understanding as the president of the company?
A. Yes, it is.
Q. And have you heard anything that contradicts
that in this hearing?
A. No, I have not.
Q. And is it consistent with the chart you
presented the other day?
A. Yes, it is.
MS. ARMSTRONG: Your Honor, that's all I have.
THE COURT: All right. Excellent.
MR. ORENT: Can we have that for a moment?
MS. ARMSTRONG: The affidavit?
MR. ORENT: Yeah, the affidavit.
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MS. ARMSTRONG: Sure.
MR. ORENT: Okay.
THE COURT: Is Mr. Carlton free to leave?
RECROSS-EXAMINATION
BY MR. ORENT:
Q. Just on that one point, if we could zoom in on
that same paragraph there. I believe it was paragraph
15.
MR. GLASSER: 12.
MR. ORENT: 12. Sorry.
Q. Mr. Carlton, the distribution center, MCV LLC,
earns approximately half of the margin, right? That's
what that says, right? And the sales entity, MCV US
Sales, earns approximately half the margin.
That does not say that Atrium gets half the
margin, does it?
A. The distribution center earns half of the
margin and the sales entity earns approximately half the
margin.
Can I see the rest of the piece, because
that's --
Q. If you go down, number 14: Margin returned to
Atrium is reflected in the profit and loss statement.
A. Right. So -- so then the margin is returned
through Maquet.
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So if you read 13, 13 says: The margin earned
by the distribution center, MCV LLC, is returned to
Atrium on a monthly basis.
Q. You're aware of the profit and loss statements
in this case, correct?
A. Yes.
Q. How do you explain how the cost of goods sold
exceeds the sale price?
A. The -- the -- the transaction that is taking
place is that we are selling from Atrium to Maquet
Cardiovascular at what is known as standard cost
initially. So that standard cost has some fluctuations
and particularly in those years that we've looked at,
there have been extraordinary circumstances where our
costs at the -- what we estimated for the cost at the
beginning of the year versus the costs that have
occurred during the course of the year have been much
higher. And there were multiple reasons and I can go
into those for each year, if you'd like.
MR. ORENT: Thank you.
No further questions.
THE COURT: All right. Done with this witness
then?
MS. ARMSTRONG: Yes, your Honor.
THE COURT: All right. Mr. Carlton, you are
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free to go.
(Witness excused.)
THE COURT: And you may call your next
witness.
MR. CHEFFO: Thank you.
THE COURT: Thank you.
THE WITNESS: I'm not sure what to do with
this.
THE COURT: I would hand that back to Counsel.
He has a couple of exhibits.
MS. ARMSTRONG: Your Honor, if I may approach,
I'll grab the exhibits.
MR. CHEFFO: We're going to call, your
Honor -- we're going to call Mr. Alex Fernandez, your
Honor, and just for the -- you may recall, Mr. Fernandez
and then Professor Orcutt and then I think that'll be
our witnesses.
THE COURT: So Mr. Fernandez will go first?
MR. CHEFFO: Yes, your Honor.
THE COURT: He is the gentlemen for whom there
is a sealed portion?
MR. CHEFFO: There is, and I -- we're going to
try to not seal it --
THE COURT: Okay.
MR. CHEFFO: -- but I --
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THE COURT: Excellent.
MR. CHEFFO: But thank you for being
considerate about that. We're trying to do it at a high
enough level that it doesn't really implicate these
issues.
THE COURT: Okay.
MR. ORENT: Your Honor, at this point, a
housekeeping item.
As the parties have planned to do these
closing presentations this afternoon, Mr. Glasser's
going to be handling the final witnesses. I'd like to
be excused to prepare that argument.
THE COURT: That's fine.
Do you have any objection?
MR. CHEFFO: No, of course not, your Honor.
As much as I love Mr. Orcutt -- Orcutt -- Mr. Orent --
MR. ORENT: You know, everybody does that to
me.
MR. CHEFFO: -- I'm -- professor -- you're not
the professor yet.
My only question, while we're talking about
this, we have talked about it and obviously to the
extent that the Court would find closings helpful,
certainly we're happy to do that. And we also think
what might be helpful is some type of posthearing
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submission -- again, not a hundred pages, but, you know,
something within a reasonable period of time to tie some
of it together.
I -- I think we've both been -- both sides
have been very optimistic about -- you know, and there's
no fault; I've done it, too. I think I told them
yesterday I was going to be an hour and it took longer.
I think, you know, Mr. Orent thought it would be 45
minutes and obviously it took a little longer.
So I'm only raising this because by the time
we get through here, you know, I'm not sure I'm going
to -- maybe I'll finish, hopefully, by around
lunchtime --
THE COURT: We'll break at noon.
MR. CHEFFO: Right. So I'm not sure I'll be
done exactly then and then obviously they'll have some
questions and then we'll have, you know, Professor
Orcutt, you know.
So to the extent, obviously, we have time and
your Honor has the inclination to hear some -- you know,
some 20, 30 minutes of closings each, obviously we'd be
happy to do that, but in lieu of that, we certainly can
submit or even in addition to that.
So that all -- obviously whatever your Honor
thinks is best.
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THE COURT: Okay. We'll cross that bridge
when we get there this afternoon. And I'm happy to hear
arguments if counsel would like if we have time.
MR. CHEFFO: Great.
MR. ORENT: Thank you, your Honor.
THE COURT: All right.
THE CLERK: Mr. Fernandez, would you please
rise and raise your right hand.
ALEX FERNANDEZ, having been first duly sworn,
testified as follows:
THE CLERK: Thank you. Please state your full
name and spell your last name for the record.
THE WITNESS: Alex Fernandez,
F-e-r-n-a-n-d-e-z.
THE CLERK: Thank you very much. Please be
seated.
DIRECT EXAMINATION
BY MR. CHEFFO:
Q. It's still morning, Mr. Fernandez. Good
morning.
A. Good morning.
Q. Were you asked to prepare a report in
connection with this litigation?
A. Yes, I was.
Q. And would you please tell the Court what --
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the general scope of what you were asked to do in terms
of what you were asked to address?
A. I was asked to address the solvency of the
company as well as the company's ability to meet its
operating needs and its obligations.
Q. And did you work with us and ask us to assist
you in preparing some slides that would assist and
facilitate your testimony here today?
A. I did.
Q. So one of those slides, in order to try and
move this along, we've prepared a summary of your
professional experience and education. Would you be
good enough to just explain for the Court and take the
Court through some of your experience and education.
A. Certainly. I have a bachelor's degree in
accounting from the University of Florida, minor studies
in economics.
I spent the first five years of my career with
Coopers & Lybrand, where I had the responsibilities of
performing multiple audits of multinational
corporations, including addressing their ability to
continue as a going concern in each and every case.
I then spent the next approximately five years
with Deloitte, where I ran -- I was a manager of their
litigation service group, which primarily focused on
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evaluations and due diligence work as well as
investigative audits and assessment of damages.
Subsequent to that, I started what is now AFC
Group. I'm the managing director. It's a specialized
firm that focuses on those services as I was performing
at Deloitte.
I'm a certified public accountant. Obviously
you need to be that in order to be able to opine on the
fair value of financial statements with these firms.
In addition to that, I'm also a certified
fraud examiner, which is a certain level of experience
and education and continuing education relating to the
identification of fraud.
And I'm a certified valuation analyst, which
focuses on the valuation of companies and allows you to
issue certified valuation reports on companies.
Q. All right. Are the types of issues, albeit a
narrow issue, that you've been asked to render an
opinion on here today consistent with your professional
training, your work experience, and your education?
A. Yes, they are.
Q. Is this the first time you've testified in
court?
A. No, it is not.
Q. Would you give us just a general overview of
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the types of cases that you've testified in and some of
the -- the clients, the government entities that you've
testified on behalf of?
A. Certainly. I've been retained by the federal
government, U.S. Government, U.S. Attorney's Office,
been retained by the SEC, FDIC, RTC. I was the expert
for the Committee of Commerce in the review of financial
institutions during the financial institution crisis.
I have been retained by foreign governments to
review complex financial transactions. I've been also
retained by multiple multinational companies in
performing either investigative audits, valuation work,
or doing assessment of damages in litigation.
Q. We don't need to run through all of them, but
is it fair to say that in addition to what we've talked
about, you've also been a member of several professional
associations and affiliations?
A. Yes, I have.
MR. CHEFFO: Your Honor, I'd move
Mr. Fernandez as an expert in solvency and accounting.
MR. GLASSER: No -- no objection.
THE COURT: All right. Motion granted.
MR. CHEFFO: Thank you, your Honor.
Q. You are being compensated for your time?
A. Yes, I am.
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Q. And what is your hourly rate?
A. It's 475 an hour.
Q. And prior to your work in this case, have you
ever done work for Atrium Medical?
A. No, I have not.
Q. Have you ever worked with me before?
A. No, I have not.
Q. Have you ever worked with Getinge AB?
A. No, sir.
Q. Any Getinge-related company or entity?
A. No, sir.
Q. And am I correct you have no financial
interest or affiliation with any of the Getinge group of
companies?
A. That is correct.
Q. Now, before we get into the details, would you
provide just a brief summary of your opinion in this
case?
A. I have concluded that as of December 31, 2017,
that Atrium was, in fact, solvent. It had adequate
capital, it had sufficient liquidity to meet its
operating needs and its obligations. That held true for
2015 and 2016 as well.
Q. Now, let's talk a little bit about some basic
accounting principles that are, you know, commonplace to
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you, but may not be commonplace to many of us who are
not CPAs.
But what are the types of general accounting
principles that are used by businesses? What are they
called?
A. Clearly in the United States we're obligated
to report under general accepted accounting principles
that provides uniformity in the way companies report and
classify assets in their financial statements.
Internationally, they use the -- very
comparable rules, a set of rules that are referred to as
International Financial Reporting Standards.
There's a lot of overlap where they are
similar, if not identical, but there are some distinct
differences as well.
Q. And is one of the -- one of the goals of these
rules to try and have some uniformity about how -- how
financials are recorded and interpreted?
A. Certainly. You know, if not, you would have
the wild west out there in how people report revenues,
report expenses, you know, how they treat their balance
sheet and income statements. So it -- it provides a
standardized methodology and a process from which to
report.
Q. Is it fair to say you're very familiar with
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these rules?
A. Yes, I am.
Q. And they're essentially your stock-in-trade;
they're the way you have been operating when you've been
an accountant?
A. Certainly. As a CPA, when you issue an
opinion, you're basically attesting to the fact that the
financial statements are presented fairly in conformity
with either domestic standards or international
standards.
Q. Now, Getinge AB, you know, is a foreign
company, a Swedish company, correct?
A. That's correct.
Q. What -- what are the standards that govern
Getinge?
A. They're required to report under international
financial reporting standards.
Q. And for your benefit and the Court's benefit,
I may not say Getinge AB all the time, but that's what
I'm going to be referring to when I say Getinge. Okay,
Mr. Fernandez?
A. That's okay.
Q. Now, what types of accounting standards apply,
if any, to Atrium?
A. Well, Atrium does not issue a separate
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financial statement, so they're not obligated to report
under either GAAP or International Standards. Their
reports are prepared for internal consumption, to assist
management in the running of the company as well as to
assist the shareholders, owners of the company, in
gauging the performance of the company.
Q. So is that -- would it be different if they
were a listed company on NASDAQ or the Stock Exchange?
A. Well, they can maintain their statements for
internal purposes the way they do, but once they issue a
formal report, it would be presented in accordance with
those standards.
Q. And because they're not, they don't have to
follow those, the GAAP standards?
A. That's correct.
Q. Now, what is a consolidated financial
statement?
A. Again, if you have a parent company with
multiple subsidiaries, they are, in fact, required to
consolidate those subsidiaries into one financial
statement, one income statement, one balance sheet, one
cash flow statement, one set of footnote disclosures.
Q. So the IFRS, which -- by which -- which binds
Getinge AB, requires Getinge AB to compile consolidated
financials; is that right?
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A. That's correct. Any wholly owned subsidiary
or subsidiary where they have a -- control is defined by
the regulations would need to be consolidated and rolled
into their financials.
Q. But you know, and we've seen throughout the
last few days and more so in the discovery, that Atrium
does maintain financial records, correct?
A. They certainly do.
Q. And why do they do that?
A. As a separate entity, they need to be able to
measure -- first of all, they need to have the tools to
be able to manage the company. Financial statements
provide that tool to the managers. The owners of the
company need to have a way to measure their performance.
So it's necessary from multiple standpoints.
Q. Now, do -- because Atrium doesn't -- is not
required to follow GAAP and uses its -- its financials
for internal purposes, does that mean that they're
somewhat inaccurate or improper or -- or somehow not
useful?
A. Not at all.
Q. And in connection with your work and your
evaluation and your deep dive into some of these
financial issues, have you found any issues that lead
you to believe that the Atrium financial statements are
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not reliable or inaccurate?
A. No, I have not.
Q. And that's not a basis of your testimony here
today, is it?
A. I'm sorry?
Q. That -- that -- that's not part of your
opinion or your testimony today, correct?
A. While I did not perform an independent audit
of the statements, I have no reason to believe that the
numbers were not fairly presented. I perhaps took
issues with a couple of classifications just for
purposes of determining solvency, but that's more of a
tool than it is a result of the way they managed their
internal records.
Q. In determining solvency -- and we'll talk a
little bit about this later, but in determining
solvency, you -- you found it was important to apply the
GAAP standards, correct?
A. There's -- there's certain measurements --
there are certain measurements --
MR. GLASSER: Now that we're getting into the
opinion, I'd object to leading, like to the exact
opinion.
THE COURT: Okay.
MR. CHEFFO: I'll try and do better, your
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Honor.
THE COURT: Okay. Go ahead.
Q. In connection with your -- your -- your
analysis and your opinion with respect to solvency, how,
if at all, did GAAP come into play?
A. Well, to the extent that, you know, 30
years -- 38 years of applying and analyzing financial
statements, I'm used to seeing them represented in
accordance with GAAP. I usually try to get them to that
same standard in order to be able to properly analyze
them.
But more specifically, when you're looking at
specific items such as gross profits and gross margins
and current ratios, you want to make sure that you're
considering the right accounts for those measurements
tools.
Q. Okay. Now, Getinge AB's financial statements
are audited, correct?
A. Yes, they are.
Q. Do you know who audits them?
A. I believe PricewaterhouseCoopers is their
auditors.
Q. A large, very prominent organization, right?
A. One of the final fours.
Q. And are Atrium's financial statements audited,
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to the extent that you know?
A. Well, they would be subjected to the same
procedures as the parent company. They're not audited
on a separate company basis, but they are subjected to
audit procedures based on the parent company's audit.
Q. Okay. Thank you.
Now, as a general matter, what is solvency?
A. In the most general way to look at it,
solvency is when you have assets in excess of
liabilities. That's generally the first thing that you
look at.
However, you also want to go beyond that and
look at the company's ability to meet its current
operating needs as far as do they have sufficient
liquidity to meet those operating needs and that they
can meet their financial obligations as well. And
normally we use the term foreseeable period, but that's
usually defined as within the next 12 months.
Q. Okay. And what is adequate capitalization?
A. Again, it goes part and parcel with the
entity's ability to meet its operating needs; does the
entity has sufficient capital to meet its operating
needs and its obligations.
Q. And when you are undertaking the task or the
assignment of evaluating a company's solvency, how do
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you go about doing that?
A. You start off by going and doing an analytical
review of the financial statements, look at the income
statement, analyze the income statement, try to identify
what the key metrics are, whether the company is a net
contributor to capital in each and every year or whether
they're actually drawing on capital as a result of
operating losses. If there are operating losses to be
considered, you want to find out why they're losing
money; is this a recurring issue, is this a nonrecurring
issue.
So you want to be able to do a -- a very close
look at the income statement as well as the balance
sheet, which will tell you the assets that are available
that may be convertible into cash, the liabilities that
are going to become due over the next 12 months, does
the company have the ability to meet those obligations.
Q. Okay. And we'll talk a little more about it,
but in addition to looking at -- at the documents, the
balance sheet, the income statement, did you also -- in
connection with your assignment in this case, did you
speak with anyone? Did you look at any other materials?
A. Well, certainly. It's not enough to read the
statements. You have to have an understanding of how
the different accounts are presented, what's captured
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within the individual accounts, what is the substance of
that account, and how would you consider that in a
solvency analysis.
So I did have interviews with both the tax
director and the CFO of the company. In a
multinational, you have all the transfer pricing issues,
which are primarily tax-related issues or regulated by
the tax bodies, I should say. So you have to have an
understanding of how that -- how those transfer pricing
adjustments are being recorded and are they, in fact, a
fair value as required by the taxing authorities, are
they in compliance with the various authorities, whether
it's European authorities, UK authorities, U.S.
authorities.
Q. Particularly with a company that's a
subsidiary that is not required to follow the GAAP
rules, that's not audited, is there anything untoward or
improper or nefarious about actually talking to the CFO,
the head of tax, and the CEO in order to just understand
how the business operates and how the policies and
procedures are being implemented?
A. I don't see how you can do that without those
discussions.
Q. And do you believe that the information that
you were provided and that you reviewed was sufficient
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to enable you to assess Atrium's solvency and
capitalization through December 31st, 2017?
A. Certainly.
Q. And would you give the Court just a general
overview or as much as you need to to explain what steps
you took in order to determine whether the company was
solvent up to December 31st, 2017.
A. I started by analyzing the income statement.
I was trying to make two basic determinations from
reviewing the income statement; does the company
generate a profit from the sale of the units that it is
manufacturing, a gross profit, and does the company
generate an operating -- operating income or an
operating loss from the total results from operation.
If the company is reflecting a loss or
reflecting a negative number in any of those categories,
then you want to make sure you understand why it is
reflecting that negative number and that's where the
inquiries and the consultations are important.
Q. And that's what you were talking about
earlier. To the extent that you have a question about
either a positive or a negative number that may need
some explanation, that's when you would talk to some of
the professionals?
A. Each one of those observations may require you
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to dig deeper. You know, you don't necessarily accept
it at face value. You want to know why.
So, for example, if a company is reflecting a
negative gross profit number, you want to understand
why. If the company's losing money every time it sells
a product, the more they sell, the more they're going to
lose, that's obviously a critical concern in a solvency
analysis.
If the company's net result, its net income,
is a negative number, obviously you want to make sure
that the company has sufficient capital to absorb those
losses for a foreseeable period or until the point that
they can actually turn that around.
Q. And, similarly, you don't -- am I correct you
don't take at face value something that somebody tells
you from the company if it's inconsistent with your
professional experience or documentary evidence, right?
A. Well, certainly. I mean, you go in there with
your understanding of how it's supposed to be done, how
the companies typically do it, and that's the way you
pursue your discussions.
Q. Now, you indicated that you reviewed Atrium's
income statements for 2015 to 2017, right?
A. That's correct.
Q. And would you just explain for us what an
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income statement is?
A. The income statement in this case is capturing
all the transactional data of the company for the prior
12 months, so from December -- the 12 months prior to
December 31, 2017, 2016, and 2015. It ends up being a
scorecard of how it performed that year. It reflects
the revenues that they realized, the expenses that they
incurred, and any unusual or nonrecurring items that
should be further considered.
Q. And how is -- what can you determine from an
income statement and how is it a component in connection
with a solvency analysis?
A. Well, again, that's -- part of your task is to
determine whether the company has the ability to meet
its current operating needs. So, therefore, you want to
know whether their performance is indicating a drawdown
of capital or an augmentation of capital. And then when
you look at the balance sheet, you make the
determination whether that capital is there for it.
So you look at each and every year
historically to try to understand what to expect over
the next 12 months.
Q. Now, this is -- and I apologize to you and to
the Court. These are, admittedly, some small numbers,
but we tried to call out the areas that I think we'll be
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focusing on.
Do you recognize this document?
A. Yes. These are the internal statements that
are produced by Atrium.
Q. Okay. And this is a document that you
reviewed, correct?
A. That's correct.
Q. Now, in your report, you prepared something as
Exhibit A.
So -- before we do that, so the -- the -- your
Honor, this isn't that much better, but it -- I don't --
you know, I'm not going to go into great detail. If
you'd like a copy at any time, obviously just let me
know.
THE COURT: Okay.
MR. CHEFFO: All right. Thank you.
Q. So this starts '15 -- I think we'll see this
just from a format purpose. I was a little confused
initially, right, sometimes when we're used to seeing
things left to right, but this is '15, '16, '17 starts
on the right, right?
A. That's correct.
Q. Okay. Now, I want to take a minute just to
have you explain what this is and why you went about
creating Exhibit A to your report.
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A. Well, primarily when you're dealing with a
multinational company that has transactions with an
affiliated company, you have transfer pricing rules
that -- that they are obligated to follow in accordance
to the tax instructions and according --
Q. Let's just stop there.
A. -- to the regulatory bodies.
Q. Just briefly, when you transfer pricing, just
tell us what that generally means.
A. If two companies that are part of a group or
two affiliates have companies within each other, the
rules require those transactions at the end of the day
be reflected at fair value. Those rules are critical
because without that a company can manipulate its
earnings and allocate earnings.
Many of the taxing authorities realized that
this was a common tool being done about 10, 15 years
ago, where multinationals would allocate costs to the
high-taxing districts and revenues to the low-taxing
districts so they can maximize or pay the least amount
of taxes possible.
Transfer pricing rules basically came back and
said, no, you have to be able to demonstrate to the
authorities that those transactions are being valued at
fair value. And you -- that obligation is the entity's
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obligation, the reporting company's obligation.
So companies would generally have studies
done, generally have agreements, generally have, you
know, the -- the documentation to suffice their
allocation of revenues and costs at a fair value to the
taxing authorities and to the regulatory authorities.
Q. Okay. And let's just be clear about what it
is Exhibit A is and what it is not.
So did you do this to manipulate any of the
numbers or the -- the values in -- in the statements?
A. No, this -- this was simply done to recast
the two line items that pick up the part of the sales
revenues that are not reflected in the internal and
external sales categories.
So to properly reflect a hundred percent of
the revenues derived from the sale of the product, we
needed to reclassify or to group the transfer pricing
adjustments in with the sales.
Q. So all the numbers are the same, right?
A. The numbers are exactly the same. The net
results for the company, as you can see, the $527,000
loss in 2017, was, in fact, what they reflected on their
internal. All this is is basically recharacterizing or
grouping all the revenue items for the sale of the
product within one group so they can properly be
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measured against the cost of goods sold.
Q. And you did that so that they would be in
accordance with what you understand the GAAP regulations
to be?
A. Yeah. GAAP basically requires all your
revenues to be reflected together if they're derived
from the sale of the same product in the same process.
Q. So it's all the same numbers, you only focused
on two areas that you believed needed to be -- I think
you said reclassified in order to make them consistent
with the GAAP rules; is that what you did?
A. Without -- without going through that process,
on first blush it would appear that the company's
actually losing money from the sale of the units. And
that's because the company is initially recording the
sale at a standard costing process from the originating
entity, Atrium, to the distribution center. That does
not reflect the total revenues that the company
benefitted from. That revenue isn't realized until the
sale is completed at the sales affiliate and then
transferred back to Atrium through these two accounts
through the transfer pricing adjustments.
MR. CHEFFO: Okay. May I just approach the --
that board there for a minute? I'm going to go a little
bit off script.
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Q. I don't know if you can even see it from
back there, but just while we're on this topic, am I
generally understanding -- you heard earlier that there
was an initial transfer of funds at this stage, correct,
when -- when basically the -- the company sent it to the
distribution center, correct?
A. The first step is Atrium sends the product to
the distribution center. At that point, Atrium is
recording a profit at standard cost. So it's only
recording a portion of the revenues that are being
derived from the sale of that profit.
Q. So -- so -- so it wouldn't be accurate to just
only look at this amount of money that the company
received, right, because ultimately we saw the chain.
Once it's actually sold to the customers, there's
additional funds that get transferred up through the
chain back to the company, correct?
A. Certainly. The -- the final sales price to
the end user is not determined until the sale is closed
by the sales entity. So that would be your -- your
third circle down. At that point, then there's a
true-up, which is basically the -- a determination of
here's how much money we made on the sale of the product
and we're going to allocate those profits based on their
internal agreements, which I believe is approximately 50
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percent.
Q. Right. So if we were to just look at this
transaction and say -- and pretend like this didn't
exist, right, it would look like the company's getting a
lot less than it ultimately is, correct?
A. Certainly. It doesn't include the full sales
that's being realized by Atrium.
Q. So what you tried to do was to basically
capture the reality of the situation, correct?
A. Correct.
Q. And basically not just look at the amount of
money that comes at this stage, but figure out exactly
the real real-life impact, which is when there's a sale,
they actually get 50 percent -- approximately 50 percent
of the profits, correct?
A. So they're actually deriving revenues at two
different stages; the first stage on transfer, the final
on the -- on the sale to the end user.
MR. GLASSER: I object to the leading. I
think the witness should be asked a -- some questions
that he can answer.
THE COURT: Okay. Overruled.
Go ahead.
Q. Now -- excuse me, your Honor. I think I just
covered some of my outline, so I'm just going to skip
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through it.
So let's -- let me just ask you, what is --
what does this slide represent?
A. It highlights the two accounts that are
reflected within the income statement of Atrium that are
part of the sales proceeds that are being derived by
Atrium. So I'm basically including them at the top part
of the statement so that I can properly analyze the
gross profit from the sale of the units.
Q. So when it says above the line and below the
line, can you just explain what that means?
A. Well, above the -- the line basically is, you
know, what is the gross profit that the company's making
from the sale of each individual unit. So, therefore,
we have to consider not only the standard cost in the
first stage of revenues that they realize, but also the
final sale proceeds that they share or they benefit
from.
So what this does is it allows me to consider
the full revenues that are being realized by the company
and comparing it to the cost to manufacture those
products and conclude that they are, in fact, being
manufactured and sold at a profit.
Q. So -- and that's just what we talked about,
right, in the sense of how the transaction actually
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works?
A. That's correct.
Q. And --
A. This is the mechanics of that chart, I guess.
Q. And that's -- am I correct that that's all you
did in terms of using the same numbers and you just
focused on that aspect of the balance sheet and then
created Exhibit A?
A. Yeah, it would be inconsistent with generally
accepted standards to analyze gross profit without
analyzing all the revenues derived from the sale of the
product.
Q. And because -- by virtue of the fact that you
looked at these in the way that you did and created
Exhibit A, does that mean that Atrium's books are
unreliable or inaccurate or somehow should be
disregarded?
A. No, I didn't change any of the numbers. I
mean, these are their numbers. Management is well aware
of what items need to be included when analyzing gross
profit. I -- I had detailed discussions with their CFO
regarding this and he said, of course you have to
include those line items in order to analyze gross
profit.
So, no, it's -- it's just easier for me to
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reflect that calculation after I make these two
adjustments rather than doing a separate, set-aside
calculation.
Q. And you were asked to perform a solvency
analysis, correct?
A. Correct. I mean, gross profit from the sale
of your product is an important metric to look at in a
solvency analysis.
Q. And the -- the way the books and records and
financial information that's maintained by the company,
that has many purposes, right?
A. That's correct.
Q. Now, for solvency analysis, are we concerned
with gross profit?
A. Certainly.
Q. Would you please tell us why?
A. If a company can't make money, if a company
can't cover its costs to manufacture a product from the
sales price that it derives from it, then you've got an
issue. So you've got to -- you know, you've got to do a
lot more digging and understanding to find out how it is
that they're going to overcome that significant problem.
I mean, you could sell a product at a loss for a
short-term period of time, but you cannot indefinitely
sell a product at a loss.
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Q. You had an opportunity to hear Mr. Messina
testify yesterday?
A. I did.
Q. And you've read his reports?
A. I have.
Q. How does what you've done differ from what
Mr. Messina did with respect to these issues and would
you explain for the Court why you think, if you think,
that his view was -- was not the right way to look at
this?
A. He ignores the transfer pricing adjustments
that are reflected in green on this schedule. So he
ignores a significant portion of the revenues derived
from the sale of the product to conclude that the
company is, in fact, losing money on the sale of each
and every product. It's just an incomplete assessment.
Q. Now, were you able to identify any
nonrecurring extraordinary expenses from your review of
the income statement?
A. I was.
Q. And why don't you just tell us, what are
nonrecurring extraordinary expenses?
A. Well, again, you're analyzing the income
statement for purposes of trying to figure out whether
the company's going to be using capital over the next 12
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months or contributing capital. If there are items that
are nonrecurring, then you can exclude that from your
analysis just when you're thinking about are they likely
to need capital or lose capital.
If a company is reflecting a net loss, but
that net loss is the result of a nonrecurring
extraordinary item, you have to consider that in your
cash flow demands.
Q. So just as an example, that might be, you
know, storm damage, correct, or litigation that's a
one-time deal; is that the type of thing --
A. As long as it's determined that it is a
one-time deal and not a recurring event.
Q. Now, based on your analysis, your discussions,
your experience, your looking at all the information,
your analysis of the transfer pricing issues, taking
into account Mr. Messina's views and opinions, what
opinion did you form from conducting your review of all
of that?
A. Well, we would have to continue to go beyond
the income statement. The income statement showed me
that the company did have a drawdown in capital for the
three years that I analyzed, but that a large portion of
that drawdown in capital resulted from nonrecurring
events. But, still, if you anticipate a drawdown in
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capital, if there's sufficient resources that are
reflected on the balance sheet to absorb that drawdown.
So the next step would be then to analyze what
are the sources of capital, the sources of cash and
liquidity available to the company as of that
measurement date, December 31, 2017.
Q. Okay. And could you just tell us what a
balance sheet typically is and what this represents,
slide 12, which is Plaintiff's Exhibit 31?
A. I mean, these are the real accounts as opposed
to the nominal accounts as of a specific point in time.
So we are measuring the accounts of the company as of
December 31, 2015, '16, and '17. It tells us what
assets are convertible to cash within the next 12
months, what liabilities are likely to be paid or
obligated to be paid within the next 12 months. It'll
alert you to any deficiency in that calculation and to
see whether there are other sources of -- of assets that
can be converted into current assets or liabilities that
are convertible into long-term liability that will
assist you in meeting your current obligations.
And it also tells you what the net worth or
the capital position of the capital -- of the company is
at a specific point in time.
Q. Okay. Now, let's look at this next slide.
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This is Atrium's internal balance sheet, correct?
A. That's correct.
Q. And how, if at all, did these balance sheets
or this balance sheet factor into your analysis?
A. Well, the first thing it tells you is if you
go to the total equity number as of December 31, 2017,
the company had in assets in excess of
liabilities.
Q. Can I just stop you for a minute?
A. Certainly.
MR. CHEFFO: I had a little trouble. I just
want the Court to -- just to orient your Honor that --
so we're pulling out, obviously, a section from this,
which is line 21-10.
Q. I'm sorry, Mr. Fernandez. Please go ahead.
A. Okay. So this roughly -- the total equity
line item represents the net assets of the company over
its liabilities. So the company has assets
on a historical basis in excess of the total liabilities
that are reflected in the company's books and records.
So that is an early, quick look that you --
that you want to get comfortable with; what is the
capital position, the net worth of the company, the
equity of the company, at these various measurement
dates.
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Q. Even from a lay --
A. It's a starting point, though, not a finishing
point.
Q. Understood. But even from a layperson's
perspective, this is basically saying they have more
assets than liabilities, right?
A. Right. Which, you know, is, in the simplest
form, solvency.
Q. Now --
THE COURT: Attorney Cheffo, we're going to
take --
MR. CHEFFO: Oh.
THE COURT: -- our lunch break. Is that --
MR. CHEFFO: No, that's perfect, your Honor.
THE COURT: All right. Good. We'll be back
then around one o'clock.
MR. CHEFFO: Thank you.
(Lunch recess taken at 12:00 p.m.)
133
C E R T I F I C A T E
I, Liza W. Dubois, do hereby certify that
the foregoing transcript is a true and accurate
transcription of the within proceedings, to the best of
my knowledge, skill, ability and belief.
Submitted: 9/27/19 /s/ Liza W. Dubois LIZA W. DUBOIS, RMR, CRR
I certify that the foregoing is a true and correct copy of the transcript originally filed with the Clerk of Court on September 27, 2019, and incorporating redactions of personal identifiers requested by the Honorable Landya B. McCafferty in accordance with Judicial Conference policy. Redacted characters appear as a black box in the original transcript and blank lines in the copies.
Dated: 10/28/19 /s/ Liza W. Dubois LIZA W. DUBOIS, LCR, CRR